Dollar follows UK downgrade and trades at five-month low


Yesterday S&P downgraded its outlook for the British economy to "negative" because government debt in the U.K. may equal 100% of GDP. The pound tumbled on the news.

Today the dollar followed suit and dropped to a five-month low, indicating just how fast these markets can move. The drop was blamed on yesterday's downgrade. The dollar fell 0.4% to $1.3941 against the euro, 0.1% against the pound to $1.5839 and 0.2% to Y94.17 against the yen. The dollar index, which is valued against a basket of currencies, dropped 0.2% to $80.349

Traders are now fearful the U.S. may go the way of the U.K. and that U.S. debt may be downgraded. We must always focus on the dollar because it is the linch pin that holds our economy together.

A continued drop in the dollar could set a nasty set of new problems in motion, one of which would be a drop in the price of U.S. treasuries.That would, in turn, cause interest rates to rise (bond prices and yields move in opposite directions. As prices drop, interest rates go up.) There could also be trouble in the stock market. Traders do not like uncertainty. Up to now we've had a nice rally. Let's hope it continues.

Keep an eye on the dollar when making your trading decisions.

Do you believe that the dollar will fall further?

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Last updated: February 13, 2012: 10:13 AM

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