[ForexNews]

The USD is rallying for the second day out of three, this time on bad news rather than good. The proximate causes: downgrades of some Dubai paper, Moody's broad hint that the US's and UK's top credit ratings are a gentleman's C, Fitch's downgrade of Greece and warning of further downgrades, and some hints from China of a potential credit tightening next year. The GBP is the weakest performer off poor economic data, concern on Dubai exposures and generalized uncertainty with respect to the financial sector. The best performers are the JPY, TWD and USD, a typical risk off configuration. The reaction seems to justify Bernanke's commitment yesterday to keep rates low for an extended period, but the odds seem to be that the outcome is some combination of increased liquidity and fiscal patchwork, rather than an extended run-up in risk aversion.

[ForexNews]

This is raising concerns on debt sustainability and putting pressure on the EUR. With a rating below single A, ECB collateral eligibility is a concern once the temporary rules for a minimum BBB- rating revert to a minimum A-, from at least one agency. In the past, ratings decisions have tended to come in waves, and further announcements seem likely from the S&P in coming days. The most likely consequence of a downgrade would be tough negotiations within the excessive deficit procedure of the European Union. Under the excessive procedure, Greece has to provide a credible strategy with “effective action” to correct the excessive deficit. Overall, euro zone officials will be mindful of possible strong spillover effects to other countries with weak fiscal positions, so the incentive seems to be to find some way to deal with Greek finances that does not drag other countries down with it. This is certainly not EUR positive, but speculation on dire euro zone outcomes seems highly premature.