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S&P: U.S. Dollar is Still The World’s Top Reserve Currency

Global Arab Network - - Rabih Serrai

Thursday, 11 March 2010 18:48

The U.S. dollar has retained its position as the key international currency, contributing to the 'AAA' rating on its government, Standard & Poor's Ratings Services said in a report published today. The article, which is titled "Après Le Déluge, The U.S. Dollar Remains The Key International Currency," says that the dollar has remained so despite the global recession of 2008, which germinated in the U.S. "If the dollar did not have this role, we believe that the U.S. would not have such ready access to external financing, interest rates would have to rise to attract higher domestic savings, and potential growth would fall," according to John Chambers, chairman of Standard & Poor's sovereign rating committee.

Using data compiled by the Bank for International Settlements, the International Monetary Fund, the Federal Reserve Bank, and the Bank of England, the report argues that the U.S. dollar did not attain this position by accident, nor does the U.S. maintain it simply with inertia. "Rather, the dollar's widespread acceptance stems from the U.S. economy's fundamental strength, which we see coming from the economy's size and the flexibility of labor and product markets," Mr. Chambers added. "As long as inflation is moderate and stable, financial markets are sound and unfettered relative to their peers, we expect the U.S. dollar to continue to be the key international currency."

In earlier versions of this article, Standard & Poor's cited the growing external debtor position of the U.S. as the key vulnerability of the U.S. dollar's reserve currency role. The U.S. 's external debt net of financial external assets relative to current account receipts is among the highest of rated sovereigns. Since the global recession, a second U.S. weakness has emerged: its fiscal position. Standard & Poor's expects that general government deficits of 11% of GDP in fiscal-year 2010 will only gradually decline to 5% of GDP by 2013, at which point the ratio of net general government debt to GDP will have reached 82%, more than doubling its pre-recession level of 38% in 2007. "Without a medium-term fiscal consolidation plan that the market views as credible, external creditors could reduce their U.S. dollar holdings. The Eurozone members as a whole face a similar challenge. In the competition for reserve currency market share, we believe fiscal outturns, inflation figures, and the current account will be determinant," Mr. Chambers concluded.

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