USD will recover after decline due to possible revision of U.S rating

Oil&Gas Materials 29 July 2011 20:28 (UTC +04:00)

Azerbaijan, Baku, July 29 / Trend A.Badalova /

The dollar is initially likely to weaken further if the US loses its AAA credit rating, Chief International Economist at the British Company, Julian Jessop told Trend. "But, we expect the US currency to rebound and end the year higher against the euro," he added.

"The dollar will rebound on safe haven demand," Jessop said.

He thinks it is likely that the US will avoid default, but still lose its AAA status.

Moody's previously stated that it has sent the U.S. ranking -AAA for revision as the country's public debt has not improved and may not improve until Aug. 2. If parties in Congress fail to find a compromise on the issue, the country may declare a default.

Markets believe that a default or downgrade will be a negative impact on the dollar, so the first reaction would be the weakening of the U.S. currency.

The markets have clearly taken the view that default and/or downgrade would be negative for the dollar. This suggests that the initial reaction to an actual default or downgrade would see the dollar weaken further.

"However, we would not necessarily expect this weakness to be sustained against all major currencies," Jessop said.

He believes the main reason why the dollar has fallen in anticipation of a default or downgrade is presumably concern that this would encourage foreign investors to dump their holdings of US government debt.

"But we would not expect major holders to rush for the exit. In particular, we suspect that China would quickly pledge to continue purchases of Treasury securities," he said.

He said China's own rating is currently AA and will remain below the rating of the United States even in the case of lowering the latter.