The dollar had a rough week without too much negative economic data being released. Perhaps investors wanted more green shoots but the real driver may have been the talk about the UK losing its triple-A rating and by extension the potential for the US to lose its triple-A. GBP fell on the news. The dollar was hit hard relative to other currencies.
Now the UK is in worse shape that the US from a rating perspective. but a signal on the UK will by extension affect views on the US. Both have growing outstanding debt to GDP which are currently at 50%. The debt to GDP is at 10% per year with no real end in sight. With the high debt to GDP each year, outstanding debt to GDP will be above 100% in about five years. The UK is also not a reserve currency like the US or to a lesser extent the euro, so a rating change will have a bigger impact than for the US in the short-run.
A ratings decline will usually occur when the outstanding debt to GDP reaches the 100% level. In the case of the UK, the rating agencies do not see the debt to GDP declining and by extrapolation the same could be said about the US. S&P has lowered the medium term outlook for the UK to negative from stable.
Moody's lowered the rating for Japan earlier in the month to Aa2 on foreign currency debt because of the high outstanding debt to GDP. S&P and Fitch had already lowered the rating of Japan to AA. Moody's cited the high level of debt, poor economics, and the expansion of the government for the downgrade. If this happens for a creditor country, it is unlikely that the US will be able to maintain its triple-A if it continues down its current path.
The ratings agencies are usually backward looking but the psychological impact of a dollar downgrade will be significant for world reserve currency. US debt is denominated in dollars so the impact on foreign rated debt will be minimal but the pressure on the dollar will continue. The pressure talk from China on a new reserve currency will be all the more important. President Obama did not help matters with a comment this week-end with a C-span reporter that "we are out of money now".
Will a downgrade come soon for the US. Unlikely, it could be years away and only after it is placed on negative watch. The rating agencies move slow, but it suggest that the focus will be public financing as much as recovery.
Now the UK is in worse shape that the US from a rating perspective. but a signal on the UK will by extension affect views on the US. Both have growing outstanding debt to GDP which are currently at 50%. The debt to GDP is at 10% per year with no real end in sight. With the high debt to GDP each year, outstanding debt to GDP will be above 100% in about five years. The UK is also not a reserve currency like the US or to a lesser extent the euro, so a rating change will have a bigger impact than for the US in the short-run.
A ratings decline will usually occur when the outstanding debt to GDP reaches the 100% level. In the case of the UK, the rating agencies do not see the debt to GDP declining and by extrapolation the same could be said about the US. S&P has lowered the medium term outlook for the UK to negative from stable.
Moody's lowered the rating for Japan earlier in the month to Aa2 on foreign currency debt because of the high outstanding debt to GDP. S&P and Fitch had already lowered the rating of Japan to AA. Moody's cited the high level of debt, poor economics, and the expansion of the government for the downgrade. If this happens for a creditor country, it is unlikely that the US will be able to maintain its triple-A if it continues down its current path.
The ratings agencies are usually backward looking but the psychological impact of a dollar downgrade will be significant for world reserve currency. US debt is denominated in dollars so the impact on foreign rated debt will be minimal but the pressure on the dollar will continue. The pressure talk from China on a new reserve currency will be all the more important. President Obama did not help matters with a comment this week-end with a C-span reporter that "we are out of money now".
Will a downgrade come soon for the US. Unlikely, it could be years away and only after it is placed on negative watch. The rating agencies move slow, but it suggest that the focus will be public financing as much as recovery.
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