The credit rating agency Fitch downgraded the bonds of the United States yesterday, but the US dollar exchange rate still strengthened.

Fitch, the credit rating agency, downgraded the United States' bond rating from AAA to AA+ yesterday. This move triggered anger in the White House and surprised market participants. However, the US Dollar Index (DXY) continued its rally, reaching the highest level of 102.77 during the New York session on Wednesday, August 2nd.

us dollar index

Automatic Data Processing Inc (ADP) reported that the non-farm private payroll in the United States increased by 324k in July 2023. This number is lower than the increase of 455k in the previous month but much higher than the consensus estimate of only 189k. This indicates that the US labor market conditions are gradually weakening, but not as bad as market predictions.

The market views this conclusion as a positive sign ahead of the Non-farm Payroll data release on Friday, leading to a continued strengthening of the US dollar. Meanwhile, the market disregards Fitch's downgrade of the US debt rating.

Fitch downgraded the US debt rating for several reasons. First, the deteriorating fiscal conditions in the US over the next three years. Second, repeated tensions in the negotiations over the US government's debt ceiling have threatened Uncle Sam's ability to repay its debts.

Goldman Sachs believes that the rating downgrade does not contain new information. Furthermore, due to this change, they assess that no major investors will sell their US Treasury bond holdings.

The negative market reaction to this news is primarily limited to the stock market. Market risk appetite worsened, leading to US and global stock indices declining. However, this situation reinforces the US dollar's status as a safe haven.

Jane Foley, the Head of FX Strategy at Rabobank, mentioned that even in the face of bad news, there is behavior among companies and individuals who think they need their dollars to pay bills and debts denominated in dollars.

She explained that this is why there seems to be no significant backlash from such news, as it doesn't alter the fact that people still require dollars globally.