This is a painful scratch on the dollar

Credit rating agency Moody's has downgraded the rating of US government bonds, a further blow to the financial image of the United States and to the dollar, which has been in the corner for months.

The downgrade of the US credit rating is the big story on the financial and currency markets this week. Rating agency Moody's has downgraded the US debt rating from Aaa to Aa1. A simple example makes it easier to explain what everyone is suddenly so concerned about. Anyone who takes out a mortgage to buy a house has to provide all kinds of documents. The lender uses these documents to try to determine whether it is almost certain that the debt will be repaid. In a sense, rating agencies such as Moody's do the same for countries and companies. The downgrade is therefore a signal that the financial position of the United States has weakened just a tiny bit.

A bolt from the blue
The news does not exactly come as a bolt from the blue. In 2023, Moody's already warned that a credit downgrade could be coming. Fitch and Standard & Poor's - the two other major rating agencies - already revised their assessment a few years ago. Nevertheless, Moody's move comes at a sensitive time. In the weeks after Trump announced all kinds of new levies on April 2, the yield on US 20-year government bonds rose from 4,5% to 5,0%. That is a remarkable movement. Usually, in uncertain times, investors take a position in Western loans that are known to be safe, which causes the interest rate to fall.

$2,5 trillion budget deficit
The interest rate hike of the past few weeks is a signal that there are some concerns in the market about the US government finances and inflation. In addition to the unpredictable policy of Trump, this is also a consequence of the rapidly growing national debt. Despite all the cost savings that Elon Musk implemented as head of the austerity department Doge, the United States is heading for a budget deficit of $2,5 trillion this year. The national debt has risen to more than 120% of GDP. In countries that still have the highest credit rating – such as the Netherlands and Germany – that percentage is usually (well) below 80.

Not bankrupt
Incidentally, you don't have to worry about the country going bankrupt for the time being. Many countries with a lower rating, such as Japan and France, can easily meet their financial obligations. It will be interesting to see how much interest there is in the auction of $16 billion in US 20-year government bonds that is taking place today. For the time being, however, it seems that the financial image of the United States and the dollar have suffered another painful scratch. Against the euro, the currency has fallen by 8% in the past four months. Due to concerns about the weakening US growth rate and the way in which the Japanese yen and Swiss franc are gaining ground as safe havens, a dollar revival seems far away for the time being.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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