Dollar Index Drops After US Credit Rating Downgrade
The dollar index (DXY00) fell by -0.66% on Monday, reaching a one-week low. This decline followed Moody’s Ratings downgrading the U.S. government’s credit rating from Aaa to Aa1 late last Friday, citing concerns over a rising budget deficit and overall fiscal health. As the downgrade raises questions about the dollar’s status as a global reserve currency, investors may begin to liquidate dollar-denominated assets. Adding to the dollar’s challenges, the leading economic indicators for the U.S. in April saw their largest drop in over two years.
In April, the leading economic indicators decreased by -1.0% month-over-month, precisely meeting expectations, marking the most significant decline since early 2021.
Comments from Atlanta Fed President Bostic suggested caution regarding inflation, as he expressed concerns about rising expectations. He indicated that he leans toward allowing only one rate cut for the Federal Reserve this year. Bostic also pointed out that Moody’s downgrade could negatively impact U.S. companies and households seeking loans.
Further comments from Fed officials indicated a preference for waiting before making interest rate adjustments. Fed Vice Chair Jefferson stated that current policy is “in a very good place,” exerting a “moderately restrictive” effect on the economy. He mentioned the importance of observing how government policies evolve and their potential impacts. Similarly, New York Fed President Williams noted that the Fed would need time to assess how tariffs and other policies could affect the economy before making any decisions.
Currently, markets are assigning a 9% probability to a -25 basis point rate cut following the June 17-18 FOMC meeting.
Euro Gains as Investors Shift Away from Dollar
The EUR/USD exchange rate rose by +0.66% on Monday, reaching a one-week high. This increase in the euro’s value came in the wake of Moody’s downgrade of U.S. debt, prompting investors to liquidate dollar assets in favor of euro-denominated investments.
Support for the euro also came from ECB President Lagarde, who indicated that the dollar’s decline against the euro reflects “the uncertainty and loss of confidence in U.S. policies among certain segments of the financial markets.”
Market swaps now show a 91% chance of a -25 basis point rate cut by the ECB at its June 5 policy meeting.
Yen Strengthens Amid Safe-Haven Demand
The USD/JPY exchange rate fell by -0.55% on Monday, with the yen climbing to a one-week high against the dollar. The increase in the yen is largely attributed to safe-haven demand following Moody’s rating downgrade. Additionally, hawkish comments from BOJ Deputy Governor Uchida indicated the possibility of raising interest rates if inflation expectations rise towards the 2% target. However, gains for the yen were limited by a significant decline in Japan’s March tertiary industry index, which fell -0.3% month-over-month, surpassing expectations of a -0.2% decline.
Precious Metals Rally Despite Rising Bond Yields
In commodity markets, June gold (GCM25) closed up +46.30 (+1.45%), and July silver (SIN25) rose by +0.153 (+0.47%) on Monday. The drop in the dollar index helped boost demand for precious metals as a safe haven, particularly following Moody’s downgrade. Ongoing geopolitical tensions in the Middle East have further supported this trend, with Israeli Prime Minister Netanyahu announcing heightened military actions.
However, rising global bond yields are a headwind for precious metals. Additionally, easing tensions between the U.S. and China have led to fund liquidations of long gold positions, with holdings in ETFs dropping to a five-week low last Friday. Comments from BOJ Deputy Governor Uchida regarding interest rate hikes contributed to bearish sentiment in the precious metals market.
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 are solely for informational purposes. For more information, please view the Barchart Disclosure Policy
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