The US dollar retains its position as the key international currency, solidifying the ?AAA? rating on its government, Standard & Poor?s argues in a report entitled ?Despite Pressures, The US Dollar Remains The Key International Currency,? released on Tuesday.
?Notwithstanding the recent depreciation of the dollar against most of the European currencies, the dollar holds a leading position in foreign exchange trading, in share of international reserves and international trade, according to data compiled by the Bank for International Settlements, the International Monetary Fund, and the Federal Reserve Bank of New York,? said Standard & Poor?s credit analyst Nikola Swann.
?Without this status of the dollar, the US would not have such ready access to external financing; interest rates would have to rise to attract higher domestic savings; growth would slow well below potential,? added Swann.
The report notes, however, that the US?s external position is weak. Net external debt relative to current account receipts is among the highest of rated sovereigns.
In 2006, 44% of US federal government debt held by the public was owned by foreigners, and this share has increased steadily since 2001, when it amounted to 30%. Of the federal government?s external debt, foreign central banks hold two-thirds.
The greatest uncertainty pertains to the trajectory of the US fiscal deficit.
Although S&P expects the general government deficit as a share of GDP to fall below 2.5% this year and to remain at or below this level through 2009, the dollar could come under increased pressure if the US fiscal accounts deteriorate or if investors come to doubt the government?s willingness to address the fiscal challenges that loom in the next decade.
Lesser risks emanate from rising inflation or protectionist trade policies.