Investing.com - The U.S. dollar fell sharply Monday in the wake of a surprise rating downgrade by Moody’s, ahead of a vote on the Trump administration’s tax bill.
At 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.7% to 100.202.
Dollar slumps after credit downgrade
Credit rating agency Moody’s cut the United States’ top sovereign credit rating by one notch to ‘Aa1’ from ’AAA’, with the credit rating agency noting that successive U.S. administrations had failed to seriously address its growing $36 trillion debt pile.
Moody’s had been the last of the major credit rating agencies to allocate the premium ‘AAA’ rating to the U.S..
The news saw the dollar turn lower against its major rivals following four straight winning weeks when it was boosted by rising optimism for U.S. trade deals and then a thaw in relations with China that eased fears of a global recession.
The downgrade comes just as a Congressional committee in the U.S. House of Representatives approved President Donald Trump’s sweeping tax bill on Sunday, setting it up for a House vote this week.
This bill is estimated to add between $3 trillion and $5 trillion to the national debt over a decade.
“The link between U.S. sovereign risk, Treasurys, and the dollar is one of capital flight,” said analysts at ING, in a note. “ Are global investors shifting their portfolios away from the U.S.?”
“Data on this comes out with a lag, and Friday’s release of U.S. Treasury TIC data for March provided few clues. Foreigners were still healthy buyers of U.S. asset markets in March, with foreign official accounts increasing their holdings of U.S. Treasurys by $26bn. Within that, however, China’s holdings of US Treasury securities fell by $19bn.”
Sterling boosted by EU/U.K. summit
In Europe, EUR/USD traded 0.7% higher to 1.1243, benefiting from the weakness of the dollar, ahead of the release of the final April consumer price index for the eurozone.
This is expected to show that consumer inflation rose 0.6% on the month on April, an annual rise of 2.2%, which shouldn’t prevent the European Central Bank from cutting interest rates in June when the governing council next meets.
However, this week’s big focus will be on Thursday’s flash PMI releases for May. “
So far, European business sentiment has been holding up relatively well. Should it continue to do so, the euro should stay supported as the liquid alternative to the dollar,” ING added.
GBP/USD rose 0.7% to 1.3367, with the pair gaining after the U.K. and the European Union reached a 12-year agreement on EU fishing boats in U.K. waters as part of a summit to reset relations between the two parties after Brexit.
“We do see the overall closer UK-EU alignment as a sterling positive, with any surprise progress sending EUR/GBP sub 0.8400 and GBP/USD to 1.3360/3400,” ING said.
Yen gains on rate hike talk
In Asia, USD/JPY traded 0.5% lower to 144.90, after the Bank of Japan Deputy Governor said the central bank will continue to raise interest rates if the economy recovers from the anticipated impact of higher U.S. tariffs.
Last week, data showed that Japan’s economy contracted more than expected in the first quarter of 2025, shrinking at an annualized rate of 0.7%, marking its first decline in a year.
USD/CNY traded 0.1% higher to 7.2127, after the release of data showing that China’s industrial production rose more than anticipated in April, with factory activity holding up well despite pressure from heightened U.S. trade tariffs on exports.
However, domestic demand showed signs of weakness, as retail sales for the month came in below expectations.
AUD/USD rose 0.3% to 0.6424, after sliding more than 1% over the prior three sessions.
Markets widely expect the Reserve Bank of Australia to announce a quarter-point cut on Tuesday, as slowing inflation allows policymakers to respond to rising global risks.