Moody's US Downgrade Rings Alarm On Asia's Dollar Assets

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Finally, it's unclear whether Moody's got Trump World's attention in the right way. Any other US administration would internalize why Moody's cut Washington to Aa1 the way S&P Global and Fitch Ratings did in years past.

Not according to Bessent's take.“I don't put much credence in the Moody's” downgrade, Bessent told CNN. He stressed that the tax-cut bill being debated in Congress remains on track. And that it would spur economic growth that generates more than enough revenue to pay down US debt.

It's an unwelcome reminder - and poorly timed one - that Trump's 1985 mindset is colliding with the global realities of 2025. As Washington gives“trickle-down economics” another try, its credit rating hangs in the balance.

So does trust in the dollar. Bessent calling credit ratings a“lagging indicator” isn't the witty argument he thinks. Not at all moment when the Republican Party is pushing a budget package - Trump's so-called“big, beautiful bill” - that will add trillions to the federal deficit. Estimates are US$4 trillion over the next decade added to the federal primary deficit , excluding interest payments sure to skyrocket.

For now, some market participants are siding with Bessent.

“Most are dismissing the news as not a big deal, and perhaps it's not,” says Michael Kramer, founder of Mott Capital.“After all, the US has already had two prior downgrades.”

Yet there's no arguing that the timing of all this could hardly be worse.“The key issue,” Kramer says,“is that this downgrade comes at a moment when term premiums were already rising, potentially adding even more upward pressure.”

As such, notes Tracy Chen, a portfolio manager at Brandywine Global Investment Management, it remains to be seen whether the market reacts differently as the“haven nature of Treasury and the US dollar might be somewhat uncertain” now.

But the dollar's troubles go much deeper than that. The euro's rally in recent weeks has global markets buzzing about viable dollar alternatives.

European Central Bank President Christine Lagarde said the recent rise of the euro against the dollar is a consequence of US President Donald Trump's erratic policies and an opportunity for Europe.

“It's impressive to note that in a period of uncertainty when we should normally have seen the dollar appreciate significantly , the opposite happened: the euro appreciated against the dollar,” Lagarde told La Tribune Dimanche newspaper.“It's counterintuitive, but justified by the uncertainty and loss of confidence in US policies among certain segments of the financial markets.”

One big worry is that US inflation remains stubbornly high as gross domestic product shrinks. Stagflation risks may be riding in real time as Trump's tariffs hit US households.

“Even if a mild recession takes hold, a higher inflation outcome seems assured given the addition of tariffs to the trajectory of ever bigger budget deficits,” says Steve Blitz, managing director at TS Lombard.“Monetary policy alone cannot reverse the trend without the deficit shrinking.”

Jeffrey Roach, chief economist for LPL Financial, adds that“the uncertainty about what might happen after these temporary trade deals makes things difficult for the Fed since stagflation remains a risk. If the fog does not clear, the Fed might not be able to adjust policy in June.”

In other words, Trump's climbdown on tariffs might've been too little, too late.

“Even though tariff fears have calmed, more time is needed to see how the existing tariffs take shape and affect inflation and the economy,” says Skyler Weinand, chief investment officer at Regan Capital.“Unless we start to see unemployment rise significantly, the Fed is likely to keep rates unchanged for the next six months.”

Analysts at JPMorgan Chase & Co point to a Moody's report from 2023, when the ratings company shifted its US outlook to negative.

On Friday, Moody's said US governments have consistently“failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.” In 2023, it warned that this moment would likely come.

But it's an open question whether Moody's is about to revive another 2023 opinion that got lots of attention. At the time, Moody's argued the dollar's place at the center of the global trading system was safe.

As Moody's wrote in May 2023:“We expect a more multipolar currency system to emerge over the next few decades, but it will be led by the greenback because its challengers will struggle to replicate its scale, safety and convertibility in full.”

Yet, it warned then that increased US protectionism, weaker government institutions and concerns about a default would imperil the dollar's global dominance.