Leaviss: QE3 would cause dollar to collapse

A third round of quantitative easing in the US would lead to the collapse of the dollar, M&G's Jim Leaviss has warned.

Speaking at a Morningstar Investment Conference today, the firm’s head of retail fixed interest said with the likely end of QE2 in June, some policymakers will push for a third round of QE in the US, as many are still concerned about the high unemployment rate.

"The Federal Reserve will not contract its balance sheet anytime soon. The dollar will collapse if we get a third round of quantitative easing, but this is not something that concerns the Fed in the slightest," he said.

The manager also believes the US will inevitably see its credit rating downgraded and is at risk of default, making the economy look more like a ‘banana republic' than a Western nation.

He said people were surprised when S&P recently downgraded the US' credit rating outlook to negative, but added the country’s level of debt to GDP is “baked into the cake.”

He said: “With the level of debt to GDP, there is nothing that can be done, it is inevitable the US will be downgraded.

“The US is behaving like an old school emerging market. In the next five years, 70% of its debt is maturing. But a small rise in inflation will cause it to spiral out of control.”

In contrast, he said the UK is in a better position because it has realised it has to borrow over the long term, issuing 30-40 year bonds.