Official White House Photo by Daniel Torok.
The Dollar stays under pressure, allowing the British Pound to creep higher.
The Dollar seemed to fall out of bed on Monday as concerns about U.S. debt swirled, reinvigorating the 'sell America' trade that sent stocks and the Dollar lower.
Although stock markets recovered, the Dollar stays weak, allowing the Euro and Pound to record renewed advances.
Investor focus was sharpened by Friday's downgrade to U.S. debt at Moody's, which came amidst efforts by U.S. politicians to push a significant new spending bill through Congress.
"With or without the bill, the U.S.' debt trajectory is unsustainable in the long run," says Rogier Quaedvlieg, an economist at ABN AMRO Bank N.V.
However, U.S. equity prices closed the day higher and long-dated Treasury bond yields fell back from earlier highs, suggesting investors are willing to kick the can down the road on the perennial view that the U.S. simply can't default on its debt given the USD is the world's reserve currency.
"The Dow Jones continued to strengthen its positive momentum, closing yesterday’s session with an impressive gain of nearly 0.78%, extending its recovery rally since the United States and China reached a temporary trade agreement. This movement reflects that investor sentiment remains upbeat despite lingering risk factors," says Linh Tran, Market Analyst at XS.com.
The U.S. 30-year debt yield had spiked to as high as 5.0% on Monday, but ultimately reversed to end the day lower at 1.90%.
The Dollar fell, but pared the excesses of the decline. Nevertheless, it stays weak, allowing the Pound-to-Dollar exchange rate to break above a key technical level and raise expectations for further gains to the 2025 high at 1.3443.
Above: GBP/USD at daily intervals, with annotations pointing to a potential upside breakout.
Although U.S. stocks recovered, the Dollar's ongoing weakness reinforces a view that "markets are already starting to doubt the U.S.’s fundamentals," says Quaedvlieg.
He explains that the U.S. is about to push through a series of unfunded tax cuts via Donald Trump's 'big, beautiful bill,' which should be passed this week, and will "substantially worsen the fiscal outlook."
An extension of the 2017 Tax Cuts and Jobs Act (TCJA) - a key component of the bill - will cost $3.3 trillion over the next decade and $5.2 trillion if the package is made permanent, according to the Committee for a Responsible Federal Budget.
The U.S. political setup means such bills cannot be easily reversed and the U.S. might not be able to course correct if it gets this wrong, as European countries are able to do (think Liz Truss' mini-budget).
"The impact is also less sudden and dramatic, leaving more scope for this to play out over a longer period of time. The fiscal largesse points to upside risks to US long-term interest rates, which could eventually prove to be a headwind for both the economy and financial markets," warns Quaedvlieg.
The federal debt held by the public currently stands at around 100%, its highest since the Second World War, and it is set to rise to 117% in ten years, even with current law.
Quaedvlieg says the bill currently being debated in Congress "takes a poor trajectory and makes it worse," pushing the 2034 debt-to-GDP ratio to 125% as written, and 129% if the plans are made permanent.
Credit ratings agency Moody’s downgraded its U.S. sovereign credit rating by one notch on Friday to Aa1, citing continued growth in the national debt and rising debt servicing costs amid still-high interest rates.
With this latest action, the U.S. government has now lost its last remaining AAA rating from a major agency, as S&P downgraded the U.S. in 2011, and Fitch followed in 2023.