May 28, 2009, 5:22 am

Is US Government to Lose its AAA Credit Rating?

by: The Financial Blogger    Category: Investment, Market and Risk
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I don’t know if you have noticed (if you are Canadian you probably did!) but the US dollar is loosing weight for the past few weeks. About a month ago, the Canadian dollar was worth $0.80 USD and now, we are getting closer and closer to $0.90 USD. We actually see similar effect on the Euro who gained 4% on the US dollar last week. So what is going on with the US dollar?

US Government and UK Government may lose their AAA credit rating

As both countries contracted humongous amount of debt during the pas 12 months in order to “stimulate” the economy (Damn you Keynes, you still make our politicians to fool around!), their debt level has increased significantly. While it wasn’t a problem for the US government to raise fund so far, some countries start to doubt about the US government AAA credit rating. We hear behind the walls that both US and UK government may lose their perfect credit rating to be downgraded.

I actually think that the UK government will lose its AAA before the US government does. We even heard rumours about UK going bankrupt. While I still think that this even will never happen, I would not be surprised to see the UK credit rating downgraded in the upcoming months.


If the US Government lose its AAA credit rating, what will happen?

First, the credit rating of any country (or company) grants it the power of raising fund faster and cheaper. The stronger your credit rating is, the cheaper you pay in interest fees. It will also be much easier to get money from others. In fact, it is exactly the same thing as an individual’s beacon score.

If the US government loses its AAA credit rating, they will have to pay a premium for the risk it shows. Therefore, it will become more expensive for the US citizen to finance stimulus checks, bailouts and massive structural investments.

Other countries (mostly Asians) are slowly selling US dollars to buy other currency. This obviously pushes the US dollar down compared to other currency such as the Euro or the Canadian Dollar. But they are not only buying other currencies. Other countries and investors historically leave the US dollar for gold which is the ultimate secured value. This is why we are looking at a soaring gold price. I would not be surprise to see gold hitting $1,000 / once during summer time.

What will happen to Canada if US Government loses its AAA credit rating?

For some strange reason, our economy seems to resist the impact of an important recession in the US. We are not running full speed, but we are not slowing down that much. The fact that the US dollar is losing value and that the oil barrel is jumping back up (from $35 last fall to $61 last Monday!) make that our Canadian dollar should keep rising until parity during summer time. I know that there is a lot of speculation on Oil right as investors are hoping for a real bullish market, but it still helps the Canadian dollar going up for now.

So if you plan on going down south for your summer vacation, don’t be in a hurry to buy US dollars! They may become cheaper 😉

EDIT: Moody’s and Standard & Poor’s both said that the US government would keep its AAA credit rating yesterday. Nonetheless, I think that just the fact of thinking about it may keep pushing the US dollar down during summer time.

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Comments

Just last year, the Cnd dollar was actually worth slightly more when I was in NY. It was awesome.
I tend to agree that the US dollar may go down again.

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