Investors could diversify out of US bonds

Foreign exchange markets are bracing for heightened volatility on Monday morning as the reaction to Standard and Poor's lowering of US long-term sovereign credit rating to AA+ from AAA sets in.

It is obvious that global investors would consider diversifying their assets out of US treasuries. This move can apply pressure on the dollar. There is also fear that some funds which are not allowed to hold any asset without AAA rating might be forced to sell treasuries in the near term.

However, it is hard to envisage a total collapse of the greenback as no investor can claim that he was unaware of the state of the US economy or the risks associated with investing in dollar-denominated assets.

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