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Dollar Plunge May Soon Hurt US Credit Rating

By Sally Maison
Published: Saturday, December 26th, 2009

Analysts cannot help, but compare the United States dollar’s fate to Tiger Woods—one bad downfall easily led to a domino of negative effects. In the dollar’s case, its weakening led to the trimming of US Treasury bonds by other countries. Some fear that this could eventually cause Uncle Sam to lose his prime credit rating which made him who he is.

Recently, China began cutting back on its US Treasury holdings because of the continuing downfall of the US dollar. The country fears that the weakening currency will hurt the value of their reserves. As the dollar dropped this month to its 2009 low, critics began questioning the strength of this country’s triple-A credit rating. To make things worse, government bonds fell as a result of rising national debt levels.

On the other hand, Federal Reserve Chairman Ben Bernanke, expressed his confidence on the dollar’s strength during his speech in Jekyll Island (GA). He said the main issue is whether this currency will be able to keep its value or not. He expressed his confidence that it will.

However, Brazil, China, India, and Russia showed no confidence on Bernanke’s word and decided to lobby for the replacement of the dollar as a world reserve currency. Economists fear that this could cause another hit to the already precarious US credit rating.

To offset risks of the falling dollar, global investors are turning to gold which caused its value to go back to $1,000. Its new price is quoted by economists as the highest it has been for years. They also noted that another carry trade is using it as standard of exchange.

Some critics find this measure exaggerated and pointed out that the dollar did not reach record lows, with its lowest value this November still five percent higher than its lowest point last year. They note that the dollar surged sharply in the middle of last year when investors sought shelter from the global economic crisis by investing on the dollar.

However, the recent dollar downfall is not viewed by economists as a sign of instability since it is gradual and is small compared to its rise in 2008. They predict that the dollar will most likely post a comeback next year and that Uncle Sam will be able to keep his credit rating.

Economists explained that this economic recovery will continue because of the decreasing unemployment and new job losses rate. Strengthening retail sales is likewise viewed by experts as another shield the US has against this global crisis hitting economic powerhouses such as Dubai and Greece.

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