by Brai Odion-Esene

WASHINGTON (MNI) - Standard & Poor's Thursday gave a vote of confidence in the U.S. dollar, saying it believes the dollar will continue to be the key international currency, a position that it will retain "so long as inflation is moderate and stable, financial markets are sound and relatively unfettered, and U.S. government spending is efficient and sustainable."

John Chambers, S&P credit analyst, prior to the public release told Market News International in an interview that one only has to look back in history to the British Empire and the fall of the pound sterling to see how a currency could lose its global reserve status.

In a report provided to Market News International, S&P said the dollar's widespread acceptance stems from the U.S. economy's fundamental strength, which in its view comes from the economy's size and the flexibility of labor and product markets.

The ratings agency bases this opinion on the U.S.'s position relative to other large, developed nations in terms of its prospective inflation and fiscal performance and investors' expectations for favorable investment returns over the medium term.

"As long as inflation is moderate and stable, financial markets are sound and relatively unfettered, and U.S. government spending is efficient and sustainable, Standard & Poor's Ratings Services expects the U.S. dollar to continue to be the key international currency," it said.

S&P said it views the U.S. dollar as the world's key currency for several reasons, all ultimately related to the firm's opinion regarding the U.S. economy's fundamental strength.

The U.S. is the world's largest economy at market exchange rates, it noted, with 25% of 2009 global GDP -- slightly more than the next three largest national economies (Japan, Germany, and China) combined and still slightly greater than the entire Eurozone. Not only that, but prices are generally stable, S&P said, and the relative purchasing power of the dollar has been comparable to other currencies.

"In addition, we view U.S. banking and capital markets to be dynamic and unfettered relative to their peers," S&P said, adding that

the U.S. dollar."

The firm also notes that many Asian trading partners, to enhance their own export competitiveness, accumulate dollars to keep their bilateral nominal exchange rates in check, while many emerging market central banks maintain a high proportion of their reserves in dollars to match the currency composition of their country's commercial external debt.

In addition, "Many investors who hold their savings in offshore financial centers value their holdings in U.S. dollars and thus have a bias toward dollar assets," it said.

The ratings agency also does not see the financial market turmoil of 2008 as having had much of an impact on the trend in this share.

It does warn that the dollar's share of international reserves could fall from its current level as the euro's track record lengthens and as some central banks with trade linkages that are less tied to the U.S. diversify their marginal foreign exchange holdings away from the U.S. dollar.

"Any decline in the dollar's share of international reserves, however, will most likely continue to be steady, gradual, and protracted over many years," S&P said, "if the history of such decline in the pound sterling's share is any indication."

So what would have to have to happen for the dollar to lose it preferred status? S&P analyst John Chambers, author of the report, told Market News International to look at the example of Great Britain and how the pound sterling lost its place as reserve currency in the first half of the prior century.

Chambers said fighting in two World Wars, the crumbling of the empire, poor monetary policy, as well as borrowing from the IMF on two separate occasions (in 1956 and 1977) contributed to the relegation of the pound to second-tier status.

"Both the U.S. and the British Empire satisfied the conditions normally associated with reserve currencies: They had large economies with a large share of global trade. Compared with peers, they had macroeconomic stability, deep financial markets, and developed political institutions," Chambers said.

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