Dollar Declines Following Credit Rating Downgrade Amid Economic Concerns

The dollar index (DXY00) is down by -0.71%, reaching a one-week low. This decline follows Moody’s Ratings’ decision to downgrade the US government’s credit rating from Aaa to Aa1, citing concerns over a growing budget deficit and fiscal stability. This downgrade puts the dollar’s status as a global reserve currency at risk, prompting potential liquidation of dollar assets by investors. Additionally, today’s report showing a decline in the US April leading economic indicators—the largest drop in over two years—further pressured the dollar. However, hawkish comments from the Federal Reserve have somewhat mitigated these losses.

Fed Officials Discuss Current Economic Policy

Fed Vice Chair Jefferson remarked that the central bank’s policy is currently in a “very good place,” exerting a “moderately restrictive” effect on the economy. He emphasized the importance of observing how government policies evolve and their subsequent economic impact, given the existing uncertainties.

The US April leading economic indicators fell by -1.0% month-over-month, aligning with expectations and marking the most significant decline in over two years. In response, Atlanta Fed President Bostic expressed concern about inflation pressures and indicated that he favors a single rate cut from the Fed this year. He cautioned that the recent credit rating downgrade by Moody’s could negatively affect US companies and households seeking loans.

Additional comments from Fed officials suggest a cautious approach toward future interest rate changes. New York Fed President Williams noted that the Fed requires more time to evaluate new data, stating it “may need months” to fully understand the impact of tariffs and other policies on the economy.

Currently, markets are indicating an 8% probability of a -25 basis point rate cut following the upcoming June 17-18 FOMC meeting.

Euro Strengthens Amid Dollar Weakness

The EUR/USD (^EURUSD) has risen by +0.79%, reaching a one-week high. The euro’s gains come as investors seek to diversify their portfolios in response to the US credit rating downgrade. ECB President Lagarde supported this trend, stating that the dollar’s recent downturn reflects “uncertainty and loss of confidence in US policies” within certain market segments.

Swaps are now discounting a 92% probability for a -25 basis point rate cut by the ECB in the upcoming June 5 policy meeting.

Yen Gains Against Dollar

The USD/JPY (^USDJPY) is down by -0.43%. The yen has reached a one-week high following the credit rating downgrade, which sparked a selloff in stocks and increased safe-haven demand for the yen. BOJ Deputy Governor Uchida’s hawkish remarks, indicating potential interest rate hikes if inflation trends toward the BOJ’s 2% target, further supported the yen. However, gains were somewhat restrained by a -0.3% drop in Japan’s March tertiary industry index, the largest decline in seven months, which was weaker than the expected -0.2% drop.

Precious Metals’ Market Moves

June gold (GCM25) is up +37.40 (-1.17%), while July silver (SIN25) is up +0.061 (+0.10%). Precious metals are benefiting from the dollar’s weakness, as investors look for safe-haven assets. The downgrade of the US credit rating by Moody’s has notably increased demand for these metals. Additionally, ongoing geopolitical tensions in the Middle East are enhancing their appeal.

Despite these upward price movements, higher global bond yields present a negative outlook for precious metals. Fund liquidation of long gold positions is also a concern, exacerbated by the recent easing of US-China trade tensions, which led to a reduction in tariffs. Last Friday, long positions in gold ETFs fell to a five-week low. Furthermore, hawkish statements from BOJ Deputy Governor Uchida, mentioning possible interest rate increases, added bearish pressure on precious metals.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy.

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