Currency market observations reveal a decreasing value of the dollar in the global arena, a trend influenced by ongoing global shifts.
U.S. Credit Rating Downgraded for the First Time in a Century
Last Friday, Moody's ratings agency downgraded the United States' long-held triple-A credit rating, marking a significant shift in the nation's financial standing. The downgrade, to Aa1, comes after a decade of rising government debt and interest payments which have outstripped those of comparable nations.
Moody's cites persistent fiscal deficits, escalating interest expenses, and mounting entitlement costs as key reasons for the decision. The agency also echoed concerns about policy uncertainty, particularly in light of shifting trade and fiscal priorities under different administrations.
The decision was influenced by the increase in U.S. public debt and interest payment ratios that have surpassed those of sovereigns with similar ratings. In a statement, Moody's expects borrowing needs to continue climbing, potentially hampering the U.S. economy as a whole.
The agency had initially warned the U.S. about a possible downgrade in November 2024, pointing to factors such as the near-debt default period in the summer of 2024. However, it considers the U.S.'s prospects "stable," thanks to "a long history of very effective monetary policy under the leadership of an independent Federal Reserve System."
U.S. Treasury Secretary Scott Bessent swiftly distanced the current administration from the development, stating that the Moody's rating is a lagging indicator, reflecting issues inherited from the past, not recent policy decisions.
Meanwhile, influential investor Ray Dalio of Bridgewater Associates cautioned that rating agencies may underestimate the real risks. Dalio believes they focus mostly on the probability of a government default, ignoring the more significant risk of a country printing money to pay off its debts, thereby devaluing the money held by bondholders.
During the same week, the dollar fell against a majority of currencies on global markets, including the euro, the yuan, and the Russian ruble. The euro rebounded from 1.1200 to 1.1350 against the dollar, while the dollar decreased against the Russian ruble and the yuan.
In the Eurozone, consumer prices increased by 2.2% year-on-year in April, with prices rising by 0.6% compared to March. The U.S. saw prices continue to climb as well, accelerating inflation in Belarus. Economists attributed the Eurozone growth to one-off factors such as the repatriation of foreign earnings by large U.S. corporations through their Irish subsidiaries, while the European Commission revised down its growth forecast due to risks associated with U.S. trade policy.
In the currency market, both the Chinese yuan and the Russian ruble hit record lows against the dollar, with the ruble reaching its lowest level since May 2023. The People's Bank of China (PBOC) cut the one-year loan prime rate (LPR) by 10 basis points to 3% per annum, aligning a record low with analysts' consensus forecasts.
Next week, the Russian currency may continue to strengthen against both the dollar and the Belarusian ruble. In such a scenario, the dollar could decrease to 78.8 against the Russian ruble, and the Russian ruble against the Belarusian could rise to 3.80 for 100 Russian. It is essential to note that experts' views from banks, investment, and financial companies may not reflect the opinion of the editorial staff and are not an offer or recommendation to buy or sell any assets or currencies.
Investors like Ray Dalio may question the accuracy of rating agencies' assessments, fearing they overlook the risk of a country devaluing its currency to pay off debts. Despite the downgrade, the U.S. Treasury Secretary claims the Moody's rating primarily reflects past financial issues, not recent policies.
