Currency strategists at BNY Mellon claim that the S&P’s decision to reduce US credit outlook to negative was very timely as the country’s debt and deficit have reached critical levels and American policymakers needed some shake-up.

The specialists note that dollar managed to gain ground on this news rather than decline as the announcement caused the revises of the myriads of risks and when the market goes risk averse dollar tends to strengthen. Of course, the issue of possible US downgrade has to be considered, but there’s no chance that the United States is ever going to default. In the euro area, on the other hand, this may really happen.

The bank says that although US can be downgraded in a couple of years, US represents the best bet in the modern world as it’s the biggest and deepest liquid market. On the other hand, it will be quite difficult to invest in the euro zone, the second largest market, due to the sovereign debt problems.

According to BNY Mellon, the US probably doesn’t deserve its AAA status but it wins in the battle for investors compared with the other world. The analysts don’t think that US debt concerns will surpass those of the euro area. It’s necessary to understand that America can always print more money, so the point of default is never going to come. In the short-term of 6-8 months the specialists expect strong dollar as it will be risk-off, but in the longer term, if the solution is to print more cash, the greenback will be weak as it has been during the last decade.


Chart. Daily EUR/USD