Moody's downgrade prompts declines in stocks and the dollar amidst rising geopolitical and economic tensions.
LONDON, United Kingdom — Financial markets faced a notable downturn following Moody's decision to downgrade the United States' sovereign bond rating from Aaa to Aa1, marking the loss of the last triple-A rating.
The downgrade, announced on Friday, is primarily attributed to increasing government debt levels and rising interest payment ratios, which are now significantly higher than those of similarly rated sovereign nations.
As a result, US stocks and the dollar experienced declines on Monday.
Asian equity markets closed lower, and European markets mirrored these losses during midday trading, with US futures also showing substantial decreases.
The dollar fell by 1% against the euro and saw similar declines against the British pound and Japanese yen.
Despite the European Union adjusting its 2025 growth forecast for the eurozone downward, citing the impact of US tariffs, the euro nonetheless gained strength against the dollar.
This rise coincided with a significant summit between EU and British leaders, five years post-Brexit.
In commodities markets, oil prices dropped nearly 1.5%, while gold—often considered a safe-haven asset—appreciated by 1% in value amid the market turbulence.
Moody's highlighted that federal deficits are anticipated to widen to approximately 9% of the US economic output by 2035, increasing from 6.4% last year.
This projected rise is attributed to escalating interest payments on debt, increasing entitlement expenditures, and relatively low revenue generation.
The downgrade by Moody's follows similar actions taken by S&P in 2011 and Fitch in 2023, raising concerns that investors may demand higher yields on US Treasuries, thereby increasing government borrowing costs.
In response to the downgrade, Treasury Secretary Scott Bessent downplayed its significance, labelling it a 'lagging indicator' and attributing the circumstances to policies under former President
Joe Biden.
The downgrade occurs against the backdrop of a contentious legislative scenario, as President
Donald Trump's proposal to extend tax cuts and impose new welfare restrictions faces hurdles in the Republican-controlled Congress.
Independent analysts project the proposed package could escalate the federal deficit by more than $4.8 trillion over the next decade.
The bill has recently progressed out of the House Budget Committee, although some Republican lawmakers have signalled the need for further modifications.
Congressman French Hill, chair of the House Financial Services Committee, remarked that the downgrade serves as a critical reminder of the US's fiscal challenges.
Key market figures around 1045 GMT included declines in major indices: London's FTSE 100 down 0.8% at 8,620.02 points; Paris's CAC 40 down 0.7% at 7,829.61; and Frankfurt's DAX down 0.1% at 23,737.40. The Tokyo Nikkei 225 and Hong Kong Hang Seng also registered slight declines.
In currency exchanges, the euro traded at $1.1275, the pound at $1.3397, and the dollar/yen rate stood at 144.79 yen.
Meanwhile, West Texas Intermediate crude was reported down 1.4% at $61.08 per barrel, and Brent North Sea crude also decreased by 1.4% to $64.52 per barrel.