Analyst: Downgrade Could Eventually Boost US Dollar

Friday, 29 Jul 2011 07:13 AM

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A decision to downgrade the U.S. credit ratings could eventually bolster the dollar because it will regain its risk-free reputation, says Kasper Kirkegaard, a senior analyst at Danske Bank in Copenhagen.

Normally a downgrade hurts a currency, but since the dollar is the world's reserve currency, it serves as a safe haven for investors fleeing risk.

Downgrading the United States due to its debt problems will spark investors to ditch risky assets as a whole, and where will they run when the dust settles?

Back to the dollar.

"The dollar’s status as world reserve currency complicates matters, however, and introduces channels that could even prove dollar positive," Kirkegaard says, according to CNBC.

"While this may sound counterintuitive, this is exactly what happened when the U.S. was put on negative outlook by Standard & Poor’s on 18 April 2011: initially the dollar weakened, but as risky assets were sold off, the dollar ended stronger on the day."

Congress must approve lifting the government's $14.3 trillion debt ceiling, but Democrats and Republicans have been unable to agree on the role tax and spending cuts should play in exchange for lifting the borrowing limit.

One economist at one of the ratings agencies that could strip the U.S. of it top credit rating says a downgrade wouldn't be too terrible.

"It's not good but I don't think it's the end of the world" if the United States credit rating is downgraded, Mark Zandi, chief economist of Moody’s Analytics, tells Good Morning America.

If Washington works out its deficit issues, sunnier skies could return, Zandi adds.

"These things aren't written in stone. We can get that triple-A back if we do the right thing."

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