Standard & Poor’s, the credit rating agency, downgraded the United States’ credit rating last Friday. You mat have seen the headlines. S&P claimed that despite the compromise on raising the debt ceiling, and avoiding default, the U.S. government has failed to address their core debt issues and thus U.S. treasury bills do not warrant the highest AAA rating.
The dollar has long been the symbol of safe investing. In fact, in investing, the interest rate on t-bills is called the “risk free rate”. Well it seems that with the downgrade, there is less international support for the greenback. China has renewed their call for a reserve currency that is not American. What that essentially means is that China is calling for the U.S. to either 1) address the growing debt problem, or 2) face a world in which China will no longer buy American bonds.
Either way, since the incarnation of the Euro, the dollar has seen its dominance slowly slip away. Since 2007 (and in some cases earlier) many OPEC members have quoted oil contract prices in currency other than dollars. Since dollars had been the traditional unit of measurement of oil contracts, and since every country on Earth uses oil in one form or another, accepting other currencies in exchange for oil was a huge first step in creating a multi-currency global economic system. And earlier this year, the Chicago Mercantile Exchange began denominating certain oil futures in Euros.
Despite all the negative publicity and the seemingly never-ending slide in value of the USD, it doesn’t appear that the currency of the United States will be going away any time soon. Too much business is still transacted in dollars and too many countries still hold U.S. debt. What is more likely is the dollar will no longer be allowed to dominate the currency market and we will no longer be able to simply “print money”. The dollar – and by extension the U.S. economy – will have to adapt and show that it is still a safe haven for investors in a world with more choice.
Update 9 August:
There’s a deeper discussion of the relationship between the Chinese and U.S. economies available here. [Yahoo! News]