Recently, global financial markets have faced a series of shocks. Phase-wise progress in China-US trade negotiations and the temporary suspension of tariffs have offered short-term relief. Simultaneously, international rating agency Moody’s downgraded the US sovereign credit rating from Aaa to Aa1, fueling risk-off sentiment in the market. As the world’s most important currency benchmark, the US Dollar Index (DXY) has become a central focus amid these events.
I. Macroeconomic Background: Easing in China-US Trade and Geopolitical Risk Release
In mid-May 2025, high-level economic and trade talks between China and the US were held in Geneva, resulting in significant interim consensus. Both parties announced the removal of 91% of tariffs and the suspension of 24% of remaining tariffs. This move greatly eased the market tension that had persisted since April. Following the announcement, major US stock indices broke above key technical resistance levels as risk appetite returned。
In addition, the reopening of Russia-Ukraine negotiations—though unlikely to result in a final agreement in the short term—helped partially alleviate risk aversion. The general market consensus is that the worst may be over and that global risk appetite has somewhat recovered in the near term.
II. Moody’s Downgrades US Sovereign Credit Rating
On May 16, 2025, Moody’s announced it was lowering the US sovereign credit rating from Aaa to Aa1, revising the outlook from “negative” to “stable.” Following the announcement, the DXY fell sharply, declining 0.66% in a single day to close at 100.426—a new monthly low.
US Treasuries faced large-scale sell-offs, with the 10-year and 30-year yields exceeding the 4.5% and 5% marks, respectively, highlighting heightened concerns among investors regarding US credit risk.
US equities gapped lower at the open but rebounded subsequently, indicating a blend of risk-off sentiment and bargain-hunting.
Reflecting on past downgrades (S&P in 2011, Fitch in 2023), the DXY saw limited short-term volatility. However, the Moody’s downgrade resulted in a notably larger single-day decline, showing that concerns over US fiscal sustainability have been mounting.
III. US Dollar Index: Operating Logic
1. Dollar’s Credit Advantage and Structural Pressures
Moody’s downgrade report emphasized that, despite the sheer scale of the US economy, its innovative capabilities, and the short-term unshakable status of the dollar as the world’s leading reserve currency, the growing fiscal deficit and mounting debt burden have already placed real pressure on US credit. The dollar’s “safe-haven” attribute persists amid global turmoil, but as US fiscal risk rises, the dollar’s appeal as a risk-free asset is incrementally weakening.
2. The Threefold Impact of Interest Rates, Inflation, and Trade Policy
Interest Rates and Yields: Rising US Treasury yields should, in theory, support the dollar. However, if these increases stem from heightened credit risk premiums rather than improved economic fundamentals, they may actually undermine the dollar’s attractiveness.
Inflation Pressures: CPI and PPI data from April show a rebound in core goods inflation in the US, in part due to adjustments in tariffs on Chinese imports. Higher inflation expectations are pushing up Treasury yields, yet also intensifying depreciation pressure on the dollar.
IV. Outlook for the US Dollar Index
1. Short-term Outlook: Mounting Downside Pressure
The Moody’s downgrade has become an immediate catalyst for a short-term decline in the DXY. Historically, such downgrades led to limited short-term volatility, but this round—compounded by the US fiscal deficit, trade frictions, and resurgent inflation—has sharply increased downward pressure on the index. Market confidence in US assets is wavering, and some sovereign wealth funds and institutional investors may gradually reduce allocation to US Treasuries and dollar assets, further dragging down the DXY.
2. Medium- to Long-term Logic: Primarily Structural Volatility
Dollar’s Dominance in the Near Term Remains Intact: Despite the downgrade, the dollar retains its key role as the world’s reserve currency, with global trade and financial systems remaining highly dependent on it. Large-scale de-dollarization is unlikely in the short run.
3. Futures Market Position Analysis
According to the US Commodity Futures Trading Commission’s report dated May 13, 2025, last week’s total net positions in major currencies were: euro net longs increased by 6,078 contracts, Australian dollar net longs by 200, British pound net longs by 689, Japanese yen net longs by 12,259, Canadian dollar net longs by 3,630, and New Zealand dollar net shorts increased by 191. No currency experienced a net position reversal last week. Notably, the Canadian and New Zealand dollars each saw a unidirectional total position change exceeding 20%.
Conclusion
In summary, Moody’s downgrade of the US sovereign credit rating—together with persistent fiscal deficits and recurring China-US trade frictions—has placed the DXY under short-term downward pressure.
The future trend is likely to be volatile with a bearish tilt. While the dollar’s status as the world’s reserve currency is unlikely to be challenged in the near term, its safe-haven appeal and credit advantage are facing structural erosion. Investors should closely monitor developments in US fiscal negotiations, tariff policy, and Federal Reserve monetary policy, and flexibly adjust their dollar asset allocations to guard against medium- to long-term downside risk in the DXY.
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