Dollar Remains Weak After US Credit Downgrade

Globe and Mail

21-05-2025

The dollar index (DXY00) today slid to a 1-1/2 week low and is down by -0.15%. The dollar remains under pressure after Moody's Ratings late last Friday downgraded the US government's credit rating from Aaa to Aa1, citing a ballooning budget deficit and fiscal concerns. The downgrade puts the dollar's status as a global reserve currency into question and may prompt some investors to lighten up on their dollar assets.
The markets are discounting the chances at 5% for a -25 bp rate cut after the June 17-18 FOMC meeting.
EUR/USD (^EURUSD) today is up by +0.17%. The euro today is moving higher due to weakness in the dollar. Gains in the euro are limited after today's news that German April producer prices contracted more than expected, which is a dovish factor for ECB policy. Also, dovish comments from ECB Governing Council members Knot and Wunsch were negative for the euro as they signaled support for additional ECB interest rate cuts.
German Apr PPI fell -0.9% y/y, weaker than expectations of -0.6% y/y and the biggest decline in 6 months.
ECB Governing Council member Knot said he 'can't rule out' another ECB interest rate cut in June, but it's 'too early' to make decisions without seeing fresh quarterly forecasts.
ECB Governing Council member Wunsch said the Eurozone economy may need interest rates at 'mildly supportive' levels to ensure inflation doesn't fall below target after a series of shocks.
Swaps are discounting the chances at 93% for a -25 bp rate cut by the ECB at the June 5 policy meeting.
USD/JPY (^USDJPY) today is down by -0.16%. The yen today extended Monday's and climbed to a 1-1/2 week high against the dollar. The yen found support today from rising Japanese government bond yields after the 10-year JGB bond yield jumped to a 7-week high of 1.532%. Also, short covering pushed the yen higher today after Japanese Finance Minister Kato said he's arranging a bilateral meeting with US Treasury Secretary Bessent to discuss topics, including foreign exchange, at the Group of Seven meetings this week in Canada. Higher T-note yields today are limiting the upside in the yen.
June gold (GCM2 5) today is up +47.50 (+1.47%), and July silver (SIN2 5) is up +0.418 (+1.29%). Precious metals today are sharply higher, with gold climbing to a 1-week high. Dollar weakness is bullish for precious metals after the dollar index fell to a 1-1/2 week low today. Also, last Friday's action by Moody's Ratings to downgrade the US government's credit rating is fueling demand for precious metals as a store of value. In addition, strong gold demand from China is supporting prices after China imported 127.5 MT of gold in April, the most in 11 months. Gains in precious metals accelerated today on dovish comments from ECB Governing Council members Knot and Wunsch, who signaled they support additional ECB interest rate cuts. Finally, geopolitical risks in the Middle East continue to support safe-haven demand for precious metals. Israeli Prime Minister Netanyahu announced an 'unprecedented attack' on Hamas and said Israel would take over the entire Gaza Strip. Also, Israel's airstrikes on Houthi rebels in Yemen continue.
Higher global bond yields today are negative for precious metals. Also, fund liquidation of long gold positions continues to weigh on prices due to the easing of US-China trade tensions after China and the US recently agreed to reduce tariffs on each other's goods. Long gold positions in ETFs fell to a 6-week low on Monday.