FOREX-Dollar softens on US ratings downgrade; trade tensions back on radar

By Gertrude Chavez-Dreyfuss

NEW YORK, May 19 (Reuters) - The U.S. dollar declined broadly on Monday, hitting a more than one-week low against the safe-haven yen, Swiss franc and euro, pressured by a surprise downgrade of the U.S. government's credit rating late on Friday, even as trade tensions also weighed.

U.S. Treasury Secretary Scott Bessent said in television interviews on Sunday that President Donald Trump will impose tariffs at the rate he threatened last month on trading partners that do not negotiate in "good faith".

But Moody's action to cut the United States' top sovereign credit rating by one notch on Friday started the ball rolling downward for the dollar. Moody's cited concerns about the U.S. government's growing $36 trillion debt pile.

The move followed similar actions by Fitch in the summer of 2023, and S&P's downgrade in 2011.

The news saw the dollar lose ground against its major rivals following four straight winning weeks when it was boosted by rising optimism for U.S. trade deals and a thaw in relations with China that eased fears of a global recession.

But from midmorning trading to the afternoon session, dollar selling lost steam.

"To me, this is not really a game changer: Moody's did not really tell us what we already did not know. We all know what's going in Washington and the large budget deficit that they are projecting," said Marc Chandler, chief market strategist, at Bannockburn Global Forex in New York.

"But what happened was Asia and Europe took the dollar down. But North Americans like myself think 'what's the big deal'? So some took advantage of that, bought the weaker dollar."

The greenback fell to 144.665 yen JPY=EBS, its lowest since May 8 on Monday, and was last down 0.5% at 144.98. It also fell to its weakest level in more than a week against the Swiss currency at 0.8317 franc.

The euro, meanwhile, rose 0.6% against the dollar to $1.1232 EUR=EBS, after earlier rising to its highest since May 9.

Sterling GBP=D3 also gained versus the greenback, adding 0.6% to $1.3355. Earlier in the session the pound climbed to its highest since April 30, as Britain agreed to the most significant reset of defense and trade ties with the European Union since Brexit on Monday.

Despite the dollar's losses on Monday, New York Federal Reserve President John Williams said that he has seen no large-scale move away from U.S. assets, and noted that the greenback remains the world's reserve currency.

China on Monday called on the U.S. to take responsible policy measures to maintain the stability of the international financial and economic system and safeguard the interests of investors.

That followed Bessent's stern warning on Sunday to countries not negotiating in good faith with the U.S. on trade.

However, a Financial Times report that the U.S. had begun serious trade talks with the EU brightened the mood a bit. Those talks broke a long deadlock, offering some hope for additional deals after Washington inked a framework agreement with Britain earlier this month.

Trump has previously said he has potential deals with India, Japan and South Korea as well, although talks with Tokyo seem to be stumbling over car tariffs.

Elsewhere, Trump cleared a hurdle towards passing a sweeping tax cut bill that would add an estimated $3 trillion to $5 trillion to the nation's debt over the next decade, after winning approval from a key congressional committee.

In other currencies, Australia's dollar AUD=D3 was up 0.66% at US$0.6444 following three days of declines ahead of Tuesday's Reserve Bank of Australia policy announcement, with a quarter-point cut widely expected.

The New Zealand dollar also rose, up 0.5% at US$0.5911 NZD=D3.