Tue, Dec 20, 2011 - Page 10 News List

Investors flock to US dollar despite S&P downgrade

Bloomberg

Four months after Standard & Poor’s (S&P) stripped the US of its “AAA” credit rating and said the world’s biggest economy was no longer the safest of borrowers, US dollar-denominated financial assets are appreciating.

Government bonds have returned 4.4 percent, the dollar has gained 8.7 percent relative to a basket of currencies, and the S&P 500 Index of stocks has rallied 1.7 percent since the US was cut to from “AAA” to “AA+” on Aug. 5. The cost for the nation to borrow has fallen to record lows since S&P said the US was no longer risk-free, with the average monthly yield last month on 10-year notes below 2 percent for the first time since 1950.

Demand for US assets is increasing as consumer confidence, manufacturing and employment show the US is strengthening as the EU struggles to save its currency union and the developed world weakens. US GDP will expand 2.19 percent next year, compared with 1.55 percent for the G10, Bloomberg surveys of economists show.

When it lowered the US rating, S&P, the world’s largest provider of credit analysis, said the failure of Democrats and Republicans to agree on budget cuts made the US less creditworthy, downplaying the country’s ability — unlike individual European nations — to print as much money as it needs to pay its debts. The US Congress passed a US$1 trillion spending bill on Dec. 17 that lawmakers called a bipartisan compromise.

Investors have looked past S&P’s warning even as government borrowing surpasses US$15 trillion for the first time and the budget deficit exceeds US$1 trillion for a third year.

Long-term Treasuries are the best performing government bonds in the world this year, returning 30 percent, according to Bloomberg/EFFAS indexes. The S&P 500 has gained since August even as the MSCI All Country World Index fell 5.7 percent.

Investors are showing no reluctance to lend to the US, bidding a record US$3.02 for each dollar of the US$1.96 trillion of Treasury notes and bonds sold this year, according to data compiled by Bloomberg. That’s up from US$2.56 in 2007 when the US issued US$581 billion in notes and bonds, government data show.

As the US strengthens, the outlook for other parts of the world is deteriorating. Economists raised their forecasts for growth in US GDP next year to an average of 2.2 percent from 2 percent in October as they trimmed their estimate for Europe by 0.5 percentage point to 1 percent according to separate surveys by Bloomberg.

US economic indicators have improved since S&P’s downgrade, with consumer confidence, as measured by the Thomson Reuters/University of Michigan preliminary index, rising to a six-month high this month.

Inflation was little changed last month and manufacturing expanded at the fastest pace in five months, according to the Institute for Supply Management’s factory index. Private employment rose 206,000 last month, the strongest increase this year, ADP Employer Services said.

The US received its highest rating from international investors in more than two years, with 41 percent saying in a Bloomberg poll conducted from Dec. 5 to Dec. 6 that the country would be among top performers next year.

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