On Friday, the Dagong Global Credit Rating Co Ltd in China reported that "In our opinion, the United States has already been defaulting." The statement was made by Guan Jianzhong, the firm's president. Dagong is the only Chinese agency that offers sovereign ratings. (read here)
Also on Friday, the German Ratings Agency Feri downgraded the U.S. to AA from AAA, due to "high public debt, inadequate fiscal measures, and weaker growth prospects." (read here)
Fitch, Standard and Poor's and Moody's have all warned that the U.S. could be downgraded if it does not raise the debt ceiling. Incredible that only through borrowing more will the U.S. not be downgraded by the three U.S. ratings agencies.
We have been stating for some time that Peripheral European news will be less important as problem countries are bailed out. We have been waiting for U.S. fiscal problems to come to the fore. We believe that we are at the beginning of global awareness of the U.S. fiscal position, and U.S. problems will weigh on the U.S. dollar going forward.
Our belief that the U.S. federal reserve has no options left but to weaken the U.S. dollar in order to grow exports was echoed on Friday by Greg Ip, in his article "Read this speech, then sell the dollar." (read here)
We listened to both Bernanke's speech and Dudley's. Bernanke's was interesting more in what he did not answer. He was asked about the affect of reserves diversification on the USD and he ignored the question. We have argued successfully for the past 12 months that reserves diversification is the primary reason for USD weakness. What else explains the global head-scratching on the higher EUR/USD in spite of "peripheral" weakness.
We believe any USD strength should be sold into. The weaker USD is not a passing phase, but rather a longer-term phenomenon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.