FX commentators, like other market commentators, are held hostage by the news cycle in constantly having to provide an explanation for market movements no matter how far-fetched. The latest one making the rounds in the FX world is that a threat to downgrade Britain's sovereign debt from AAA given a negative outlook is causing dollar weakness. (As I write, the euro is flirting with the $1.40 handle.) Since the structural flaws of the American economy are similar to Britain's, the story goes, then Treasuries be in imminent danger of downgrading. Take this write-up from Reuters (please):
The dollar fell to a 2009 low on Friday as fears intensified that the United States could lose its triple-A rating, while renewed caution about the world economy and banks prompted Asian and European stocks to slip.Oddly, Britain being put on a negative outlook--a step towards cutting its credit rating--is causing the pound to strengthen against the currency of a country merely suspected of being next in line for a downgrade. Talk about excess speculation.
The dollar's latest decline started when ratings agency Standard & Poor's cut its ratings outlook on Britain to negative from stable, stoking fears other AAA-rated countries which are running huge debt levels could share a similar fate.
Moody's Investor Service said on Thursday it was comfortable with its triple-A sovereign rating on the United States but that it was not guaranteed forever. "The main issues are related to yesterday's movement on fears that the U.S. might lose its triple-A rating," said Roberto Mialich, FX strategist at Unicredit in Milan. "This exacerbated the dollar's losses over the last few days ... (and) for the time being it's hard to imagine a sharp reversal of the dollar's trend."
I wholeheartedly agree with the idea that Treasuries do not merit an AAA rating. If "insolvent" means a high probability of being unable to meet future obligations, then the US is well on that road with its towering unfunded liabilities and make-believe gestures towards addressing them. All the same, I have expressed reservations about American credit rating agencies' willingness to given Uncle Sam a well-deserved kick in the balls precisely because they are American. Being barred from rating securities in one of the world's largest bond markets is a real threat. Moreover, who still puts stock in credit rating agencies? Weren't various subprime-related securities bestowed the same AAA rating by this motley crew prior to being revealed as (literally) junk? If clients' pressure could make these agencies slap AAA on pure garbage, what more US pressure that could affect their very ability to rate dollar-denominated securities?
Believe me, I really, really want to be wrong as the world's largest debtor nation is no more creditworthy than your average subprime security issuer. $56.4 trillion in obligations that will not likely be met given America's bleak prospects don't lie. Plus, this older estimate should be adjusted upwards given the continuing effects of the credit crisis. Ultimately, we alone will have to make informed decisions, and what I see sure ain't pretty. I hope the US gets walloped and walloped hard for its foul fiscal and monetary practices, but I'm not holding my breath.