Dollar hits four-month high as Fitch puts USA on downgrade warning

The Australian dollar hit a four-month high of $US0.9539 overnight, as the US debt ceiling approaches and credit ratings agency Fitch puts the US on a negative watch warning.

Tomorrow, the United States is scheduled to breach its debts ceiling, which would force the US Treasury to default on its debt.

This would have a dampening effect on the value of the US dollar, which would make the Australian dollar more expensive by comparison, UNSW economist James Morley said.

“An exchange rate back above 97 US cents for the Australian dollar is in theory possible – indeed, if there is a default, it is quite easy to imagine that the Aussie and greenback would hit parity once again.”

Since the start of September, the Australian dollar has appreciated nearly 6% against the greenback. A lot of this could be thanks to American policy, Morley says.

“We were in a situation where financial market expectations about Australian interest rates were the biggest driver of the Australian dollar, which had fallen about 20% off its peak last year.

“Now, however, US monetary policy is driving its rise again.”

But it’s not the only factor. The RBA has had an influence too.

“The RBA had been in an easing cycle, but expectations have shifted away from any further cuts,” Morley says. “The data out of China is stronger than expected, and the RBA is making sounds that they’re not going to ignore big increases in house prices if the economy is weak. They don’t want to fuel an asset-price boom.”

This morning, Fitch warned the US could lose its top-grade AAA credit rating.

"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a US default," Fitch said in a statement.

Morley says the ratings agency is reflecting the “very obvious”, but any move towards a downgrade by it is consequential, as it affects the borrowing costs for the US government.

Overnight, House Speaker and Republican Jon Boehner tried twice to get government funding bills through the lower house, but both bills failed to get enough support to pass.

White House spokesman Jay Carney said while progress was being made, “we’re far from a deal at this point”.

An American default would have catastrophic global consequences, but Morley is expecting a deal at the last minute.

“There’s not a lot of incentive for Obama to negotiate at this point, as he’s not going to pay a political cost for what the public sees as a responsibility of Congress. The Republicans don’t want this on their hands, so they’ll leave it until the last moment to back down.”

The Australian dollar pulled back slightly this morning – at 11am, it was buying $US0.95.


This article first appeared on SmartCompany.

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