US Credit Downgrade and Tariff Shockwaves Shake Major FX Pairs

Dollar Slide Deepens Amid Moody’s Cut and Trade Uncertainty

The foreign exchange landscape shifted significantly as the U.S. dollar faced fresh pressure following a sovereign credit rating downgrade and tariff turbulence. Moody’s decision to cut the U.S. credit rating from Aaa to Aa1 has rattled global markets, with analysts pointing to surging federal debt and persistent fiscal deficits as key contributors. These concerns have been compounded by the Trump administration’s announcement of renewed tariffs targeting Chinese and Asian exports, reigniting fears of a broader trade conflict.

These developments have triggered a broad retreat in the greenback. The euro gained considerable ground, with the EUR/USD pair climbing above 1.1186. The move reflects a combination of dollar weakness and renewed confidence in the eurozone’s relative economic stability. Meanwhile, the Japanese yen also strengthened as investors turned to traditional safe-haven currencies in response to elevated risk sentiment. The USD/JPY pair dipped toward 145.31, highlighting investor wariness amid growing geopolitical tensions.

The Forex.com weekly forecast notes that traders are now increasingly positioning around central bank rate cues and shifting U.S. fiscal outlooks, with a potentially prolonged phase of dollar weakness on the table.

Emerging Market Currencies Ride Oil Retreat and Weak Greenback

Among emerging markets, the Indian rupee saw a modest appreciation, closing at 85.40 against the U.S. dollar. Lower crude oil prices and a broadly weaker dollar were the driving factors. The Times of India reports that improved local sentiment and narrowing trade deficits also played a role in supporting the rupee.

Other Asian currencies like the Korean won and Taiwan dollar have also seen upward momentum. These moves come amid speculation that regional governments may seek strategic currency alignments ahead of intensified trade negotiations with Washington. Japan, Korea, and Taiwan are reportedly exploring bilateral deals or revaluation pacts, aiming to insulate their economies from the ripple effects of U.S. protectionism, according to Reuters.

Elsewhere, the Russian ruble has appreciated by nearly 40% year-to-date, reaching 80 per dollar. While driven by easing geopolitical tensions and a drop in imports, this rally is viewed with skepticism. Analysts warn that the ruble may be overvalued and vulnerable to a sharp correction, especially if commodity flows or sanctions tighten once more.

Looking Ahead: Market Braces for Volatility

Looking forward, the market remains cautious. The Bank for International Settlements has flagged the risk of a “dollar scramble” should investors unwind their positions in the $113 trillion FX swap market too quickly. As the U.S. faces dual pressures of fiscal deterioration and trade upheaval, volatility is expected to remain high in the near term.

Currency traders should monitor upcoming U.S. economic data, global central bank actions, and any further policy signals from the White House, as these will shape the next wave of FX movement across major and emerging market currencies alike.