S&P: U.S. Debt Level Poses Risk to Strong Dollar

Thursday, 11 Mar 2010 07:02 AM

 

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The U.S. dollar is still the most important world currency, Standard & Poor's said on Thursday, but added that rising levels of U.S. debt and dependence on foreigners to finance much of pose risks to the currency's primacy.

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 percent of outstanding U.S. debt in 2009 and Japan held 21 percent, the agency said. Overall, 46 percent 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 percent.

The U.S. budget deficit is forecast to near 11 percent of output in fiscal year 2010, while the ratio of net general government debt to gross domestic product will have reached 82 percent by 2013, more than double its 2007 level of 38 percent, 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 percent of foreign exchange reserves at central banks, down only slightly from about 72 percent 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 percent of foreign exchange transactions in the fall of 2009, S&P said, off only slightly from 90 percent in 2001.

And while the euro has made some inroads when it comes to cross-border finance, the dollar still dominates world trade.

"For every country surveyed, the share of exports invoiced in U.S. dollars exceeds the U.S. share of the country's exports -- often by a wide margin," the report said.

© 2014 Thomson/Reuters. All rights reserved.

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