When you print money wildly and run up a mountain of debt, sooner or later you pay the piper. That’s what both Britain and US have been doing and now their credit rating is in jeopardy. From today’s Financial Post of Canada:
The U.S. dollar’s day of reckoning may be inching closer as its status as a safe-haven currency fades with every uptick in stocks and commodities and its potential risks – debt and inflation – are brought under a harsher spotlight.
Ashraf Laidi, chief market strategist at CMC Markets, said Wednesday a “serious case of dollar damage” was underway.
“We long warned about the day of reckoning for the dollar emerging at the next economic recovery,” Mr. Laidi said in a note.
Mr. Laidi said economic recovery would weigh on the greenback as real demand for commodities, coupled with improved risk appetite, caused investors to seek higher yields in emerging markets and commodity currencies. This would draw investment away from the U.S. dollar, which was dragged down by growing debt and the risk quantitative easing would eventually spark a surge in inflation.
The U.S. dollar slid against most major currencies Wednesday, hitting a five-month low of US$1.3775 against the euro and pushing the Canadian dollar up US1.21¢ to a seven-month high of US87.69¢.
John Curran, the senior corporate dealer at Canadian Forex, said the U.S. dollar would likely fall further in the next week, with the Canadian dollar likely reaching about US88.35¢, at which point it could break higher to test the US92.35¢ level.
And Britain under Gordon Brown has been, if anything, even more reckless that we have. From today’s UK Telegraph:
Britain has moved a step closer to losing its prized AAA rating after a leading ratings agency downgraded the country’s outlook because of the deteriorating state of the public finances and political uncertainty over how to repair them.
Ratings agency Standard & Poor’s lowered the outlook to negative from stable. A lower rating would mean that S&P believes Britain is no longer fit to be in the club of top creditworthy nations, which would undermine its ability to borrow cheaply.
Although S&P said lowering the UK’s outlook to negative “does not necessarily precede a rating change”, it is generally considered to be the first step towards a downgrade.
At some point, the Fed has to begin soaking up the excess money from the economy, which is going to be the trickiest maneuver of all. Question for the reader: how does Bernanke do it without moonshot interest rates?
Meanwhile, what began with a few ‘idle’ comments by the Kazakhstan president about a new reserve currency has become an open discussion about the Chinese Yuan competing with the dollar.
Nice to see that Allahpundit has caught up with the story.
