Dollar jumps after Fitch's surprise decision on US credit rating

On Wednesday, the dollar saw an increase in its value following an unexpected downgrade of the US credit rating.

The dollar index reached close to its four-week peak at 102.8.

At the start of Wednesday, stock indices, oil prices, and other high-risk investments experienced a sharp decline, while the dollar began to strengthen as a safe-haven asset.

The FxPro analyst team has noted that the unexpected downgrade of the US long-term credit rating to AA+ by Fitch has caused the markets to begin a gradual but broad risk reassessment, with some of the implications not being so obvious.

FxPro notes that the unexpectedness of Fitch's move is disheartening, as the rating was not being evaluated and the outlook was "stable". Additionally, the debt ceiling drama concluded a few months ago and is not anticipated to return in the upcoming quarters.

After harshly criticizing the US for its growing budget deficit and "governance erosion", Fitch stripped the country of its top rating. This downgrade has caused further concern for equity investors, who are already anxious about the possibility of a recession and the sustainability of stock market growth in 2019, according to Bloomberg.

Fitch's downgrade of the country was due to the anticipated deterioration of its financial situation in the next three years, as well as the increase of its already high debt load.

Promsvyazbank warns that the US national debt, which is currently enormous (119% of the country's GDP), could lead to more serious budget issues after the 2024 election year if interest rates continue to rise.

Since 1994, Fitch has held the highest US credit rating. In 2011, S&P lowered its rating from AAA to AA+ due to another debt ceiling crisis. Meanwhile, Moody's, the third of the big three agencies, still has a AAA rating.

MUFG predicts that the dollar will continue to drop in the second half of the year. They believe that the USD will not recover until the first half of 2021, when the US and global economies slow down due to tighter monetary policies, resulting in an increased demand for safe-haven assets like the dollar.

State Street predicts that the dollar index will increase by 5-6% from its current level by the end of the year. This is likely to be supported by the Federal Reserve's decision to raise interest rates at least once, or even twice, during the year.