Moody’s says Dollar’s “Undisputed” Reserve Currency Role is Important Factor Underpinning US Aaa Rating
But ratings agency sees little threat to dollar’s preeminence in next few years.
Selected excerpts from US Dollar to Remain Undisputed Global Reserve Currency for Foreseeable Future (Premium)
Recent speculation about the future of the dollar as the world’s reserve currency is, in Moody’s view, unfounded. Despite the US’s external deficits and dollar depreciation, we believe that the likelihood of the dollar losing its prominent role as a reserve currency remains very low for at least the next three to five years:
- Regardless of the current state of US public finances, the economic and political factors underpinning the dollar’s reserve currency status are still aligned in favour of the dollar and are likely to remain so for some time.
- There are no plausible alternative currencies that are ready to take the US dollar’s place as the global reserve currency. We do not consider the Chinese renminbi and the IMF’s Special Drawing Right (SDR) to be credible alternatives.
- Inertia and the interconnectedness of financial markets, not to mention the size of the global market for dollar denominated debt, highlight the difficulties of a global switch from the dollar to another currency – and thus help to preserve the dollar’s status.
Our view that the dollar is unlikely to lose its role as the reserve currency represents an important element of the debt metrics that support the US’s Aaa rating.
However, despite Moody’s views about the dollar’s undisputed status, this report nevertheless considers the unlikely scenario of the dollar declining in importance or even losing its reserve currency status.
The main impact of such a loss is likely to be felt through an increase in yields as the market for US paper diminishes – a reduced degree of “debt finance-ability”. Estimates of the likely increase vary widely depending on circumstances and are by their nature highly speculative, but we estimate that yields would rise by 120bps on average.
From a ratings perspective, such a (hypothetical) increase would have its main impact on the US’s debt affordability, i.e. the ratio of interest payments to general government revenues and one of the key metrics that determines the boundary between Aaa and Aa sovereigns.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
