Nikola Swann: External imbalances put the dollar at risk of ratings downgrade.
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, Swann says. “Without the dollar’s status, 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,” he says. The result would be a vicious circle that would negatively affect both the dollar itself and the US economy as a whole.
At a time when foreigners hold 44% of the US debt held by the public, up from 30% in 2001, the US is forced to maintain strong-growth policies to motivate external creditors to maintain their dollar holdings, Swann says. This is particularly true when the dollar has been falling against its chief rival, the euro, since 2005, he says. “Any policy that exacerbates the imbalances would put the dollar’s role as the key international currency more at risk,” he explains.
In a worst-case scenario, if the dollar’s preeminent role as an international currency should begin to diminish as a result of the budget deficit, worsening inflation or protectionist trade policies, this would even weigh on the triple-A rating of the US, Swann warns. The dollar didn’t win its predominant status by accident nor maintain it simply by inertia, he says.