Why the U.S dollar is immune to Fitch downgrade in the long term
The dollar index struggled to rise on Wednesday after Fitch downgraded the US government’s credit rating raising questions about the country’s financial outlook, although it received some support from a range of relatively stable economic data.
The agency flagged a potential downgrade earlier this year.
Rating agency Fitch downgraded the U.S. rating from AAA to AA+ on Tuesday, sparking an angry response from the White House and surprising investors, despite the resolution of the debt limit crisis. The deadlock was resolved at the end of May, but it caused uncertainty
The United States was stripped of its top national credit rating by Fitch Ratings mirrored the decision made by S&P Global Ratings.
Both price cuts were fueled by a bitter stalemate over the country’s borrowing.
History suggests the impact on financial markets may be short-lived, although the move could prompt increased market volatility in the near term.
The fallout from Fitch Ratings’ downgrade of the US rating has focused on countries that still retain the most coveted credit ratings.
The economies ranked highest by S&P Global Ratings, Fitch and Moody’s Investors Service are Germany, Denmark, the Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore, and Australia. Canada is rated AAA by two of the rating agencies.
Fitch said the one-step downgrade to an AA+ rating reflects “governance erosion” that has “manifested in repeated deadlocks over debt limits and last-minute solutions.”
This is because every few years, through a policy of its own, the United States faces the prospect of default.
A law dating back to 1917 resulted in an overall fixed dollar limit on borrowing – the debt ceiling – that could only be raised with the consent of Congress and the president.
The Fitch downgrade is said to have a limited impact, the dollar is steady.
The dollar eased slightly in Asian trade after being downgraded but kept most of its gains this week after economic data showed some resilience in the US economy.
Analysts say that while the downgrade of Fitch will raise some risk aversion in the near term, it will have less of a broader impact on financial markets.
U.S. Treasuries are considered the safest assets in the world because they are backed by the full confidence and credit of the United States.
U.S. government debt is typically issued as U.S. Treasury securities.
These securities, known simply as Treasuries, are considered by many to be the safest investments because they pose no significant default risk.
Therefore, it is not surprising that investors turn to US Treasuries during times of heightened uncertainty as a haven for their investments.
This happened again during the recent financial crisis.
In fact, the increase in demand for Treasuries was large enough that the price actually went up along with the increase in the supply of government securities.
Despite the emergence of BRICs, the greenback, thanks largely to its liquidity and reliability, is used as the primary currency of choice by the majority of the world’s central banks, which are goods that hold a large portion of their reserves in dollars.
To be sure, central banks have been big buyers of gold as concerns grow about the ramifications of de-globalization and what is seen as “fragmentation” as new blocks of transactions are discussed. reasoning and formation.
Foreign businesses continue to borrow in dollars and use the dollar in their usual business operations, with the dollar being the primary payment and invoicing currency for global trade.
