USD could be impacted more by political reactions rather than by the Fitch announcement per se – Rabobank

Fitch lowered the US credit rating to AA+ from AAA. Do downgrades matter? Economists at Rabobank analyze USD outlook.

The resilience of US growth this year is a positive factor

In past periods of stress regarding the US debt ceiling, treasuries have seen buying pressures on the back of safe-haven demand. A negative risk event generally triggers a positive USD response, almost irrespective of its source. This is related to Greenback’s use worldwide as an invoicing currency and its dominance in the global payments system.

While the USD has not shown much initial reaction to Fitch’s announcement, the news should draw attention back to the management of fiscal policies in the US. 

The resilience of US growth this year is a positive factor. That said, growth is expected to slow this year and both the budget deficit and the debt/GDP ratios are expected to rise through 2023 and 2024. The Bloomberg survey forecasts the US budget deficit at 5.7% and 5.8% of GDP in 2023 and 2024 respectively from 5.4% in 2022. The survey also forecasts that US debt will stand at 97.3% of GDP this year and 99.8% next year. These numbers are notably higher than in the pre-pandemic years. 

It is possible that over the medium-term the USD will be impacted more by the political reactions that the Fitch announcement generates, rather than by the announcement per se.