S&P Lowers Credit Outlook For World’s Largest Economy, U.S. Dollar Benefits From Flight To Safety

Standard and Poor’s maintained its ‘AAA’ sovereign debt rating for United States, but lowered its long-term outlook for the world’s largest economy to ‘negative’ as U.S. policy makers struggle to meet on common ground. The rating agency saw a risk that Congress may fail to address the ‘long-term budgetary challenges by 2013,’ and said that it may take years before the government is able to stabilize the debt burden as the disparity between the two leading parties remain wide. In response, U.S. Treasury Assistant Secretary Mary Miller said that S&P ‘underestimates’ the government’s leadership and argued that Congress will take the appropriate steps to address the fiscal challenges as both parties see a growing need to tackle the swelling deficit. As the risks for the U.S. economy heightens, the Federal Reserve may see a greater case to carry out the additional $600B in quantitative easing throughout the first-half of the year, and the central bank may keep the benchmark interest rate close to zero for most of 2011 as it aims to balance the risks for the economy.

Nevertheless, the bearish U.S. dollar reaction to the announcement was certainly short-lived, and the greenback may continue to appreciate throughout the North American trade as currency traders scale back their appetite for risk. Indeed, we saw the EUR/USD pare the advance to 1.4349, and the exchange rate may continue to retrace the advance from earlier this month as it threatens the upward trend from earlier this year.