USD weakens after US credit rating downgrade.
USD weakens after US credit rating downgrade.
The Dollar Struggles as Fitch Downgrades US Credit Rating
A rollercoaster ride in the foreign exchange market as the US dollar faces uncertainties following Fitch’s downgrade of the country’s credit rating.
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The US dollar struggled to gain ground after Fitch Ratings cut the United States’ credit rating from AAA to AA+. This move has raised concerns about the country’s fiscal outlook, drawing an angry response from the White House and surprising investors. The downgrade came despite the resolution of the debt ceiling crisis two months ago, which adds to the market uncertainty. As a result, the greenback slipped, giving the euro a lift, pushing it towards $1.10.
On the other hand, sterling also gained against the dollar, while the US dollar index managed to stay slightly higher, albeit slipping after the Fitch news broke. Despite the initial market reaction, Rodrigo Catril, senior currency strategist at National Australia Bank (NAB), emphasized that the Fitch decision may not have a lasting impact on the market.
“We don’t think the Fitch decision is that material. Certainly, we’ve seen the market move a little bit this morning … but over the near term, I don’t think it’s going to be a longer lasting driver,” said Catril.
Despite the blow to the dollar’s reputation, it found some support in the positive economic data released. On Tuesday, reports indicated that US job openings remained at levels consistent with tight labor market conditions. Although they fell to the lowest level in more than two years in June, this is seen as only a temporary setback. Additionally, an accompanying report revealed that US manufacturing could be stabilizing at weaker levels in July, with new orders showing gradual improvement. However, factory employment dropped to a three-year low, signaling mixed signals for the US economy.
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Meanwhile, the Japanese yen managed to gain some strength against the dollar, but this comes after three sessions of declines since the Bank of Japan’s (BOJ) decision to loosen its grip on interest rates. The minutes of the BOJ’s June policy meeting revealed the need to maintain an ultra-loose policy for the time being. This decision left traders trying to assess the implications, prompting the market to still adjust.
“I think the market is still trying to get their head around what this whole thing means,” said Catril.
Shifting our focus to other currencies, the Australian dollar was able to reverse some of its significant fall as it gained 0.12% against the US dollar. The Reserve Bank of Australia (RBA) held interest rates steady and signaled that it might be done tightening. This decision was seen as an appropriate response given that trimmed mean inflation met the RBA’s June forecast, and retail trade dipped ahead of the decision. Matt Simpson, senior market analyst at City Index, noted that it would have resulted in confusion if the RBA had raised interest rates.
In contrast, the New Zealand dollar faced a decline of 0.23% against the US dollar following the release of data showing the country’s jobless rate hitting a two-year high in the second quarter. This is a concerning development and further highlights the challenges faced by the New Zealand economy.
In conclusion, the US dollar’s struggle after the downgrade to its credit rating by Fitch reflects the uncertainties faced in the foreign exchange market. While the initial reaction led to a slip in the dollar’s value, positive economic data provided some support. Yet, the market remains cautious and uncertain about the implications of the BOJ decisions and the future direction of central bank policies. As the rollercoaster ride continues, traders and investors must navigate through the fluctuating waves of the forex market.
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