Australian dollar soars to US96 cents as America gets downgraded

The Australian dollar reached another recent high overnight, pushing above $US0.96 as Chinese ratings agency Dagong downgraded US debt from A to A-.

Dagong is not one of the ‘big three’ influential credit ratings agencies (Moody’s, S&P and Fitch), and its downgrade has been seen by some as a self-serving attempt by Chinese authorities to damage America.

For example, US-based foreign exchange expert and BK Asset Management managing director Boris Schlossberg told AAP the move was “no doubt self-serving and part of a broader Chinese campaign to ‘de-Americanise’ global trade”.

Nonetheless, the downgrade appears to have prompted a sell-off of the American currency, despite American lawmakers yesterday reaching a deal to avert an American debt default caused by its debt ceiling.

In the wake of this, the Australian dollar rose in comparison. At 6am AEST, the Australian dollar was buying 96.30 US cents – its highest point since June 13.

The American debt standoff has also affected other currencies – the Euro is almost at a yearly high against the US dollar for similar reasons.

Brian Martin, a currency strategist at ANZ Research, wrote this morning that despite the debt-ceiling agreement, “the impression is that whilst avoiding a potential default in the short term, the longer-term fiscal issues have yet to be addressed, and optimism on that is low”.

On Wednesday, before US lawmakers reached an agreement, Fitch put the US Government on a downgrade warning.

This was significant, UNSW economist James Morley told SmartCompany at the time, because if any of the big three credit ratings agencies were to downgrade the US, it could prompt a global sell-off of American government bonds. Such bonds are a favourite of institutional investors, who are often forbidden by their mandates to buy risky debt, as determined by the ratings agencies.