As if by cue...
Ratings Warning Keep Currency Investors On Edge
By FABIO ALVES
Warnings that France and Germany may face pressure on their credit ratings caught currency investors off guard as countries with finances perceived as solid join those fiscally stressed nations on the rating agencies radar.
The four largest Aaa-rated countries--the U.K., the U.S., France and Germany--face "an increasingly delicate balancing act" as they consider spending cuts to reduce government debt, Moody's Investors Service said Monday in a review of those countries' ability to retain their top rating status.
Moody's reiterated that there was no immediate risk of a downgrade of the big Aaa-rated countries, although the slight risk they could fail to get their finances under control, and thus be downgraded, has increased.
"The surprise is that [Moody's] has seen fit to put Germany and France in the same bracket as the U.K. and the U.S. who are running much larger deficits," said Michael Hewson, a currency analyst at
CMC Markets in London.
However, Hewson noted, "any indication that the respective governments are not serious about their obligations with respect to their deficits and ratings, will see investors vote with their feet and head for the exits."
Concerns about the fiscal health of the weaker members of the euro zone, particularly Greece, helped push the common currency nearly 5% lower against the dollar this year. The U.K. pound also has slumped against the greenback, sinking 6.8% this year, on the back of worries that the upcoming general elections will result in a divided Parliament, making it more difficult for the country to tackle its growing budget deficit.
"We would not expect any ratings downgrades for the U.S. or France and Germany but we do see fiscal policy as remaining an important factor for currencies in the months ahead," said Vassili Serebriakov, a currency strategist at
Wells Fargo in New York. "Meanwhile, currencies backed up by a robust growth profile and strong public finances position such as Australia, Canada and Norway should remain in demand."
Despite the deteriorating U.S. fiscal situation, the dollar's traditional role as a safe-haven, along with the yen, and the prospect that U.S. economic recovery may lead that in Europe and Japan account for the greenback's better performance against the euro and sterling, traders said.
"The difficulty is that this kind of repeated warning [by Moody's] is an effective assault on all paper currencies, yet both typical safe haven volunteers of the dollar and yen seem to catch investors' eyes when such a pronouncement is made," said Andrew Wilkinson, senior market analyst at
Interactive Brokers in Greenwich, Conn.
"In truth, the deteriorating fiscal situation facing the dollar is possibly the worst of all but month after month it gets overlooked just because there is no immediate scare story," Wilkinson said.
Write to Fabio Alves at
fabio.alves@dowjones.com
