Not many people, in their right minds, would expect to see a major downgrade of the US Dollar just before the start of the United States fiscal year. After all, the current policy of quantitative easing, not to mention the recent impact of the stock market decline, has been to provide a clear view of how bad the economic situation is.
What few people knew, until recently, was that the Federal Reserve Board was anticipating large adjustments of the capital controls that were imposed by former President Bush, which resulted in the downfall of the equity market. By now, a major downgrade of the US Dollar, combined with a strengthening dollar, would be expected.
This is what a major downgrade of the US Dollar, along with an increased interest rate, would mean for the US Stock Market. It is also what the Federal Reserve Board and central banks around the world, from Europe to Japan, are looking at doing to stem a possible economic recession.
The S&P 500 would likely see a reduction in its market capitalization. This decline would have a greater impact on the financial market as well as the economy.
Right now, it appears that the crisis has become systemic. The Governments of Europe and Japan have taken steps to shore up their fiscal health. China has responded to the need for action on economic reform by launching the Asian Infrastructure Investment Bank.
There is some hope that the stock market will recover from this severe downward slide. The question is, “What will happen if the dollar is downgraded.” Can the US economy to weather this storm without damaging its financial conditions?
Some observers believe that the answer to this question is no. A major downgrade of the US Dollar could result in the banking sector moving into a consolidation phase, to avoid heavy losses that may result from a massive loss in confidence. The need for more controls on banking could be related to a more widespread default on collateral and therefore new collateral requirements may be imposed, which would translate into more costs for the banking sector.
Even with the stocks recovering from the most recent plunge, the stock market is a speculative market. It is a market where traders take advantage of a rising share price to purchase stocks, which they hope will appreciate in value. The worst thing that could happen is that this trend could turn sharply downward if the financial systems of the world failed.
Of course, the markets would have to recover from these serious issues before things get better. The question is, “Is it too late?” With so much at stake, and with so many economies, the world over, at risk, it is important that the correct actions are taken to prevent an economic meltdown.
There is a growing sense of panic about the impact of the global financial crisis. Forcing a major correction of the markets is not going to help.
In fact, the current political climate, as witnessed by the US fiscal policy and the European politics, might make it more difficult to deal with a downgrade of the US Dollar. It is certainly going to take time, but, eventually, things will get back to normal, and we can begin to see the benefits of the necessary changes, as the tide starts to turn back to the right direction.
So far, there is no sign of a downgrade of the US Dollar. For now, the markets have been shaken, but the damage is limited, as things are beginning to pick up again.