Cited: Reuters

Business 2As of March 11 according to Standard & Poor’s, the US dollar still rules as the most important world currency.  However, they added that the rising level of US debt and dependence on foreigners for financing could pose risks to the currency’s supremacy.

Without a credible plan to rein in fiscal spending, the agency said external creditors could reduce dollar holdings, which could put pressure on the United States’ ‘AAA’ credit rating, which keeps government borrowing costs low.

For now, the credit ratings agency said the size of the U.S. economy — the world’s largest — and the depth of its financial markets mean the dollar will continue to dominate global trade and foreign exchange transactions.

Those advantages helped the dollar retain its top status despite the financial crisis of 2008-09, which began in the United States, S&P said in the report.  The agency also said the dollar’s role is an important factor supporting the United States’ AAA credit rating — the highest investment-grade rating.

The main risk to the dollar’s status comes from the growing amount of U.S. government debt, S&P said, particularly the share held by foreign central banks and sovereign wealth funds.  It also said widening U.S. fiscal deficits were a risk, adding “without a medium-term fiscal consolidation plan that the market views as credible, external creditors could reduce their dollar holdings, especially if they conclude that euro zone members are adopting stronger macroeconomic policies.”

China held 23% of outstanding U.S. debt in 2009 and Japan held 21%, the agency said. Overall, 46% of U.S. government debt held by the public in 2009 was owned abroad — by both official and private investors.  That amount has increased nearly every year since 2001, when foreigners held 30%.

The U.S. budget deficit is forecast to be near 11% of output in fiscal year 2010, while the ratio of net general government debt to gross domestic product will have reached 82% by 2013, more than double its 2007 level of 38%, the ratings agency reported.

“In our opinion … inflation figures, trade volumes, foreign exchange volatility and the current account will be the leading indicators if the dollar’s role were to diminish,” the report said. “Such a scenario could even weigh on the ‘AAA’ rating of the United States.”

Some of the largest U.S. creditors, including China and Russia, have complained about U.S. fiscal and monetary policies over the past year and talked about future alternatives to the dollar.

So far, however, there have been few indications that investors or governments are shying away from the greenback.

S&P noted that the U.S. dollar still accounts for about 62% of foreign exchange reserves at central banks, down only slightly from about 72% in 2001.

“Any decline in the dollar’s share … will most likely continue to be steady, gradual and protected over many years,” the agency says.

The dollar still accounted for 86% of foreign exchange transactions in the fall of 2009, S&P said, off only slightly from 90% in 2001.

The dollar still seems to dominate world ready while the euro has made some inroads when it comes to cross-border financing.  The report also stated that for every country surveyed, the share of exports invoiced in US dollars exceeded the US share of the country’s exports, often by a wide margin.

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My Take: I do not know about anybody else, but I don’t like the idea that almost 50% of the US debt is held by China and Japan.  One country we practically destroyed in World War II and the other we have been at odds with because they are a communist country.  Am I the only one that sees a problem with this?

It’s not like country just can dial-up and get a commercial mortgage financing or something.  Can a country go bankrupt?  I can just see the president scrambling to get commercial loan restructuring just to pay the debt.  Yeah, right!  That would be about as bad as playing online poker with somebody else’s credit card.  The US deficit is one of those political points that no politician wants to talk about.

The politicians would rather spend their time at casinos online than talk to people about how much the US owes to foreign countries.  The funny thing is, they did bring that deficit down real quick by taking a 10% wage cut themselves.  There are total of 435 politicians.  Can you imagine how much money would be saved if they did take a cut in pay?

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