Dollar rallies after S&P ratings downgrade

Both the U.S. dollar and Treasury prices are stable, at least relative to the financial Armageddon dragging down global equity and commodity markets, leaving many onlookers wondering how the world’s largest government can get away with a downgrade as unscathed as it appears to be. Ten-year treasury yields softened as investors dumped stocks while the government, amongst others, sling mud-shots at Standard & Poor’s for its decision to run away with one of the nation’s three ‘A’s.’ The answer is quite straight-forward: The policies run from Washington today are no different than they were on Friday, nor are they likely to shift this week or next. S&P has quite rightly called the U.S. administration for its profligate policies and says it’s basically on the road to ruin. Investors are not disagreeing with the ratings agency by clamoring for more Treasuries but crucially they are increasingly mindful of where the current set of policies is leading. This is why the reaction is abundantly clear within growth-sensitive equities rather than within government securities. Those who claimed that a downgrade would leave U.S. government debt prices in the dust were simply wrong.

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U.S. Dollar – The U.S. might have suffered an embarrassing blow, but it is investors around the world who set the cost of borrowing, and for now there is no demand for a premium. Rather the lower growth trajectory that is now more visible has increased demand for dollars in some quarters. Risk is certainly off the table this morning as investors reflect on policy effect since the financial crisis, seeing the rising cost but little other than moderate growth in the rear-view mirror. The dollar earlier suffered significant losses against both Swiss franc and Japanese yen but those trends were already in motion to such an extent that last week domestic intervention had already taken place. As equity index futures stage a minimal rebound from heavy losses ahead of the official opening on Wall Street, the dollar index is now higher at 74.67 as it overcomes earlier resistance in the remaining European units.

Euro – The ECB staged an emergency meeting over the weekend and said it would resume purchases of bonds issued by Spain and Italy. By stating that it welcomed efforts made by those governments in an effort to reduce their respective budget deficits, the central bank is prostituting itself to a failing political system within the Eurozone. The ECB recognized after the announcement of a U.S. ratings downgrade that all hell was likely to let loose across Asia and Europe and that lesser Eurozone governments are in far worse shape than the U.S., where maneuverability remains a key benefit. The euro initially reached $1.4400 against the dollar only to slide as investors digested the unfolding dramatic events of the weekend. The euro recently slumped to as low as $1.4201 as the ugly drama plays out. Not helping the tone in the morning was a sharp downturn in the Sentix investor confidence survey for August. The index was predicted to ease by less than two points from 5.3 in July, but in the event a sharp downturn in the expectations gauge between both private and institutional investors caused a dramatic slump in the index to negative 13.5 and the lowest reading since September 2009.

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