Dollar weakens on fiscal concerns after Moody’s downgrade

The euro-dollar currency pair rebounds from previous session losses, trading near 1.1190 in Monday’s Asian session. The EURUSD gains strength as the dollar comes under pressure following Moody’s downgrade of the US credit rating by one notch — from Aaa to Aa1 — citing rising debt levels and growing interest payment burdens.

Moody’s followed earlier downgrades by Fitch Ratings in 2023 and Standard & Poor’s in 2011.

Moody’s now projects US federal debt to reach approximately 134% of GDP by 2035, up from 98% in 2023, while the federal deficit is expected to widen to nearly 9% of GDP, driven by higher debt servicing costs, increased entitlement spending, and reduced tax revenues.

Despite these concerns, losses in the US dollar may be cushioned by easing global trade tensions.

A preliminary deal between the US and China includes plans to lower tariffs — Washington will reduce duties on Chinese goods from 145% to 30%, while Beijing will cut tariffs on US imports from 125% to 10%.

Additionally, market sentiment is supported by renewed optimism over a possible US-Iran nuclear agreement and upcoming talks between President Donald Trump and Russian President Vladimir Putin aimed at de-escalating the conflict in Ukraine.

Meanwhile, the euro shows signs of softening as expectations grow that the European Central Bank will implement another rate cut at its upcoming policy meeting.

Traders are increasingly confident in this outlook, driven by the belief that Eurozone inflation is aligning with the ECB’s 2% target and that the region’s economic outlook remains weak amid continued global uncertainty.

(Source: OANDA)