Should you sell the US dollar after Fitch downgraded US to AA+?

Because this is the first trading week of the month, the focus is on the US jobs report scheduled on Friday. Slow-moving markets and tight ranges characterize the NFP week until the report is out.

As such, it comes as no surprise that the markets did not react to the news that Fitch has downgraded the United States’ long-term ratings to AA+ from AAA.

Fitch cited lower growth and new spending initiatives as reasons for the downgrade. Also, the rating agency said that the highest interest burden was a reason for the downgrade.

Yet, markets did not react much to the news. One explanation could be that the rating watch “negative” was removed, and the “stable” outlook was assigned. Another could be that because this is the NFP week, slow trading and tight ranges are the norm.

As such, the US dollar trades sideways, but it could all be the calm before the storm. When volatility picks up, as it usually does as we get closer to the NFP report release day, the Fitch downgrade may weigh on the greenback.

What else did Fitch say?

The downgrade is mostly based on the fact that Fitch expects a fiscal deterioration over the next three years. In short, here is a list of what Fitch sees as a concern regarding the US:

• Governance erosion
• Rising deficits
• A US recession in late 2023/early 2024

Fitch believes Fed will continue to tighten financial conditions

One particularly interesting part of the Fitch report is the one referring to the Federal Reserve (Fed) ‘s monetary policy tightening cycle.

Fitch believes that the Fed is not done hiking rates, and another 25bp rate hike will come in September 2023. Moreover, the labor market and the economy’s resilience should complicate the Fed’s job to bring inflation to its 2% target.

Furthermore, because the quantitative tightening (i.e., the balance sheet reduction) continues, the financial tightening should continue well beyond the September rate hike and into 2024.

Despite the downgrade, Fitch’s view about the Fed and its policy should be positive for the dollar. Traders will have the first clue about the jobs market in a couple of days, when the jobs numbers for July 2023 will be out.