Tougher times for the greenback

From LOM Global Perspectives

The US dollar enjoyed a period of revival during the worst of the global recession. As the fires of the financial crisis spread, credit was being extinguished even as more dollars were being printed, relieving the system of an excess supply. It also helped that the United States was considered to possess a safe-haven status. Now that the world economy has stabilised and is set for recovery, the greenback is facing renewed difficulties.

Last week, the credit rating agency Standard & Poor’s committed a faux pas. It lowered its outlook, regarding the AAA rating on UK debt, to “negative” from “stable”. In issuing their outlook, they didn’t stop to think that this would draw attention to the biggest debtor of all, the United States.

Traders, already nervous about the precariousness of America’s financial position and the trends in monetary and fiscal policy, were quick to draw conclusions. The dollar was hammered and government bonds fell. Stirling, which had initially lost ground against the greenback, reversed course and moved higher. Other major currencies also made gains.

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