Standard and Poor’s (S&P), a hotshot credit rating agency, downgraded the U.S. credit rating by one notch from AAA to AA+. Although it was the first time the U.S. was stripped of its pristine credit rating, some market junkies say that the move wasn’t that big of a shocker. Rumors about a downgrade started to circle around back when the debt ceiling debates were still ongoing. Also, early on in Friday’s trading, investors got word of the move even before S&P issued its statement.
According to the whiz kids at S&P, they weren’t impressed with the debt deal that policymakers came up with. They believe that after all that time spent on political wrangling, more cuts should’ve been included.
On top of that, S&P is worried about the direction the economy is headed, warning that the outlook is still negative. According to the agency’s calculations, U.S. debt will reach as high as 93% of its GDP come 2021. Yikes! Although the U.S. Treasury disagrees and says that it would only be around 85%, S&P still warned that it may downgrade the credit rating even further in the future.
Naturally, the markets got rocked once the news hit the airwaves. The reaction in the market to sell their dollars. After all, this was the mighty U.S. that was getting downgraded!
As Big Pippin pointed out in his Daily Chart Art, we saw some huge gaps on dollar pairs over the weekend, as hedge fund managers dumped their dollars. EUR/USD gapped up by 125 pips, opening the week above the psychological 1.4400 handle. Meanwhile, after ending last week at 1.6390, GBP/USD found itself opening at 1.6465, 75 pips higher over the weekend. Overall, the USDX gapped down by nearly 90 points and opened at 74.57.
And to think that the reaction could have been a lot worse if traders weren’t already expecting a downgrade!
Of course, there are those who believe that this is a short-term reaction and that the dollar will still remain steady. That’s right – some investors still believe that the dollar is a safe haven!
Oddly enough, there is some sense to the madness. After all, where else can you put your money? Treasuries are still very liquid, and only one ratings agency has U.S. debt marked at AA+. According to Moody’s and Fitch, Treasuries are still AAA-okay!
Unfortunately for the U.S. economy, it looks like Uncle Sam has his work cut out for him. The lower credit rating of Treasuries doesn’t only make borrowing more expensive for the government, but for companies as well. Because many corporations benchmark their commercial paper (corporate bonds) against Treasuries, borrowing will become more expensive, which could further slow down the economic recovery.
I suspect that this downgrade will linger in the markets over the next few weeks and weigh down the dollar. It’ll be interesting to see what Moody’s and Fitch have to say about the situation. If they suggest that they will follow S&P’s lead and smack the U.S. with a downgrade, we could see the Greenback suffer more losses.
In the meantime, if there’s one thing I wanna get my hands on, it’s GOLD. Even though gold serves no real purpose, people still want the shiny metal. If things go from worse to worst, demand for gold will continue to rise.