S&P Cuts U.S Rating To AA+' From AAA

Despite Friday's bounce, EUR/USD is on track to close the week with losses for second time in a row as investors flied to safety favoring safe-haven assets over higher-yielding currencies over the last days.

On Friday, better-than-expected July NFP report coupled with media reports saying the European Central Bank will buy Italian bonds brought some relief to financial markets a day after Wall Street suffered its worst decline since February 2009.

EUR/USD is currently trading at the 1.4260 area, up 1.2% on the day but still 0.83% below its Monday's opening. The pair had hit a weekly high at 1.4453 on Monday and a low of 1.4054 during Friday's Asian session on the back of ECB's dovish comments.

source: fxstreet.com

S&P Cuts U.S Rating To AA+' From AAA, Outlook Negative

WASHINGTON (dpa-AFX) - Taking into account the political risks and increasing debt-burden, Standard & Poor's on late Friday downgraded U.S. sovereign credit rating by one notch to 'AA+' from 'AAA' with a negative outlook. The country has been enjoying the triple A rating for the last 70 years.

The firm also removed both the short and long-term ratings from CreditWatch negative as the government's passing of the Budget Control Act Amendment of 2011 in August 2 has removed any perceived immediate threat of payment default. S&P also affirmed the 'A-1+' short-term rating.

Announcing the downgrade, S&P said that America's governance and policymaking becoming less stable, less effective, and less predictable than what they previously believed. The agency described the statutory debt ceiling and the threat of default as a 'political bargaining chips in the debate over fiscal policy.'

Further, S&P rating services said, 'The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to, falls short of what would necessary to stabilize the government's medium-term debt dynamics.'

According to reports, Obama administration accused the downgrade as a result is sloppy mathematics and politically tainted assessment and said the calculations overstated future spending of $2 trillion.

The firm also warned that it could lower the long-term rating to 'AA' within the next two years in case of lower-than agreed spending reduction, interest rates hike, or new fiscal pressures during the period result in a higher general government debt.

The rating agency is of the view that the near-term progress in public spending or on reaching an agreement on raising revenues is less likely given the prolonged controversy over raising the U.S. debt ceiling and the related fiscal policy debate.

'The difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging,' the firm said.

Lifting the nation's borrowing limit would represent a short-term solution to the U.S debt problem. The agency has cautioned last month that a deal including drastic spending cuts may hamper the still-fragile economic recovery.

On the S&P action, the Capital economists noted that the deficit reduction package of $2.4 trillion over ten years that was signed into US law last week did not meet the $4 trillion that S&P had hoped for. They expect that the S&P rate downgrade will rock the financial markets on Monday but any spike in Treasury yields and/or fall in the dollar would be relatively short-lived.

Under the baseline upside macroeconomic assumptions of S&P, net general government debt would rise from an estimated 74 percent of GDP by the end of 2011 to 77 percent in 2015 and to 78 percent by 2021. Under the revised downside scenario, the rating agency is of the view that the net public debt burden would rise from 74 percent of GDP in 2011 to 90 percent in 2015 and to 101 percent by 2021.

The agency also noted that the government debt burden will likely be higher by 2012 and called for as much as $2.4 trillion of reductions in expenditure over the 10 years through 2021.

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