The U.S. dollar is experiencing a slight decline against most major currencies, as investors closely monitor the sustainability of the growing U.S. debt amid a general atmosphere of caution in the markets. This comes as Federal Reserve member John Williams ruled out any possibility of an interest rate cut before summer, adding further pressure on the dollar.
This pressure is not due to monetary policy itself, but rather the disappointment in markets that were hoping for monetary easing to support growth in light of increasing financial risks and a downgraded credit rating. In such a context, maintaining high interest rates becomes a source of concern rather than a factor supporting the currency, especially when coupled with economic uncertainty and deteriorating investor confidence.
Meanwhile, Moody’s shocked the markets on Friday by announcing a downgrade of the U.S. credit rating from AAA to AA1, hinting that the deterioration in financial indicators can no longer be ignored, despite the overall economic strength. This decision heightened investor caution and led to an increase in U.S. bond yields, as markets demanded a higher risk premium to cover the long-term risk of default.
In this context, several Federal Reserve officials stated that a move toward lowering interest rates remains unlikely in the near term. One regional Fed president noted that the downgrade could have cascading effects on the economy, stressing the need for a three- to six-month period to observe how the market reacts to current developments. Another official pointed out that the Fed is facing pressure from two directions: maintaining price stability and supporting the labor market — a combination that limits the room for maneuver in monetary policy.
At the same time, a Fed official emphasized that the economic outlook will not become clear before June or July, reducing the chances of a rate cut before the summer. This cautious stance might be reasonable given current data, but it increases the uncertainty prevailing in the markets and adds further pressure on the dollar amid competition from other currencies that could benefit from more flexible monetary policies.
The CME FedWatch Tool indicates that the probability of a rate cut at the June meeting stands at just 8.3%, while the likelihood rises to around 36.8% for the July meeting, amid ongoing uncertainty surrounding the U.S. economy.
Meanwhile, U.S. 10-year Treasury yields rose to around 4.51%, compared to 4.3% at the end of last week, reflecting growing concern in the U.S. debt market. This rise in yields may present an obstacle to any future move toward monetary easing, as it increases borrowing costs and adds pressure on economic growth.
Overall, the U.S. dollar is navigating a delicate phase where cautious monetary policy intersects with escalating financial risks, prompting markets to continuously reassess their expectations, while awaiting clearer signals from policymakers in the coming weeks.
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