The dollar has dropped against the pound and the euro after America was stripped of its prized top credit rating .
Sterling rose by almost a cent against the dollar after Moody’s cut the US’s credit rating by one notch on Friday, becoming the last of the major ratings agencies to downgrade the country. It cited concerns about the growing $36 trillion federal debt pile, which is set to rise even higher under Donald Trump’s tax-cutting plans.
On Wall Street, the downgrade sent the benchmark S&P 500 1pc lower in early trading, while the tech-heavy Nasdaq Composite sank more than 1.3pc.
Hedge funds led the sell-off in US assets, which also saw the euro strengthen to almost $1.13 and the greenback slip against all of its G10 peers.
It comes a day after Christine Lagarde, the president of the European Central Bank, said the euro’s recent strength was a result of Donald Trump’s unpredictable policymaking.
“It’s counter-intuitive, but justified by the uncertainty and loss of confidence in US policies among certain segments of the financial markets,” she told La Tribune newspaper
The move by Moody’s also triggered a rise in US borrowing costs.
The yield on 30-year Treasuries, as US government bonds are known, rose above 5pc in early trading on Monday. Yields move inversely to price, meaning investors are selling US debt and demanding a higher interest rate to hold it.
The jitters also hit UK borrowing costs, with 30-year gilt yields rising by almost 0.1 percentage points on Monday morning.
Long-term borrowing costs for Washington are now at their highest level since late 2023 and compare to rates as low as 1.2pc in 2020.
The downgrade came shortly after Congress failed to push through Donald Trump’s “big, beautiful bill” of tax cuts that economists have warned will trigger a renewed surge in borrowing.
Even before the downgrade, investors believed the US was more risky than other economies managing to hold on to their top credit rating.
Rabobank said investors now think the US is at greater risk of default than countries such as Austria and Finland, even though these countries do not have direct control of their currency.
President Trump is seeking to push through a package of new tax cuts that economists fear could worsen federal finances .
Analysts say the plan, which would extend the 2017 cuts from Mr Trump’s first term, would add $3 trillion to $5 trillion to the nation’s debt over the next decade.
The Institute of International Finance (IIF) recently warned that Mr Trump’s hopes that tariff revenues could help shrink the deficit may backfire if countries retaliated.
Moody’s cited America’s rising debt for its decision to downgrade the US credit rating on Friday. The debt pile is on track to reach 134pc of GDP by 2035, the agency said.
UBS said it believed the downgrade could be used as a “political tool in near-term budget negotiations, particularly among lawmakers who believe that the current ‘one big, beautiful bill’ does not do enough to shrink the deficit, but we think it is unlikely to alter the overall trajectory of US fiscal policy”.
Mr Trump’s sweeping tax cuts bill, which had been stalled for days by Republican infighting over spending cuts, won approval from a key congressional committee on Sunday to advance toward possible passage in the House of Representatives later this week.
The action was a big win for Mr Trump and Mike Johnson, the House Speaker, after hardline Republican conservatives blocked the bill on Friday over a dispute involving spending cuts to the Medicaid healthcare programme and the repeal of green energy tax credits.
Mr Johnson said the Moody’s downgrade showed the need for the bill. He said. “We’re talking about historic spending cuts. I mean, this will help to change the trajectory for the US economy.”
Scott Bessent, the US treasury secretary, blamed Moody’s downgrade on Joe Biden. He told NBC’s Meet the Press on Sunday: “We didn’t get here in the past 100 days. It’s the Biden administration and the spending that we have seen over the past four years that we inherited.”
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