Are investors in the US and abroad losing faith in the dollar?

A down trend in the US dollar is putting new focus on a longstanding concern -- that the world’s greatest borrowing nation may be growing less creditworthy.

This week, the dollar has reached new lows against the euro for 2009, and it has also fallen sharply against some other major currencies.

It’s a puzzle. Suddenly, investors have less faith in the greenback, even as the outlook for the American economy appears to be brightening.

Many forces drive currencies up and down, but one factor that could be weighing on the dollar is the risk that decades of debt -- by both households, businesses, and the government -- are causing foreign investors to look on the dollar as a more risky asset to hold.

Debt increases perception of risk

All that borrowing, including the cost of President Obama’s fiscal stimulus spending to boost the economy, increases the perception of risk. Are US debtors, from the federal government to the cash-strapped state of California, going to default? Will the Federal Reserve resort to inflation -- debasing the value of dollar assets -- in its efforts to lift a debt-bound economy back to growth?

Such concerns appear to be weighing on the dollar this week, says Jay Bryson, a global economist at Wachovia Corp. in Charlotte, N.C.

Britain in trouble too

One reminder of the risk came from across the Atlantic Ocean, as the rating firm Standard & Poor’s downgraded outlook for Britain’s government debt from “stable” to “negative.” That means Britain could lose its top-tier credit rating of AAA.

“If they can downgrade the United Kingdom, they can certainly do the same thing for the United States,” Mr. Bryson says.

The dollar took a dive on Thursday, and in Friday trading the greenback reached as high as $1.40 per euro, higher than where it stood on Jan. 1. The US currency is also down in recent weeks against the British pound and Canadian dollar.

A bad month or two doesn’t necessarily mean that the dollar will keep falling. Bryson, for example, says he expects the dollar will strengthen this year, as investors focus on the prospects for a quicker economic recovery in the US than in Europe.

Tension in global markets

But the recent dollar downdraft points to a difficult tension in global markets over whether the dollar is a safe or risky asset. It has long been a haven for investors in times of trouble, as the current financial crisis has confirmed. The dollar moved up sharply late last year as global investors fled from private-market chaos to the safety of US Treasury bonds.

But this spring, investors have shown the other side of the coin. With panic receding, some have been focusing more on the long-term risks to the dollar posed by all that debt, and by questions about whether the Federal Reserve is committed to holding inflation at bay.

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