FX alert: Dollar still on the ropes as Moody’s sends a fiscal flare

Moody’s Wake-Up Call: Tail Risk Is the Trade Now.

The dollar staggers into the week bruised by the long-telegraphed but still symbolic Moody’s downgrade—Aa1 now, and no longer wearing the triple-A crown. Traders knew it was coming, but the timing—just ahead of a House Budget Committee greenlight on Trump’s latest tax-and-spend package—adds fuel to the fiscal fire. Moody’s didn’t mince words: debt and interest burdens are now well above peer sovereigns, and Washington has no credible path to narrow the gap. In trader speak? The fiscal rot could soon get priced into the dollar very badly.

This isn’t just another ratings footnote. With S&P and Fitch already having pulled the trigger, Moody’s was the final holdout—and arguably, the one the bond market still pretended to respect. Cue the trifecta: the dollar’s soft, yields are climbing, and equity futures are rolling over. It’s shaping up to be a classic “triple unwind” session—risk off, dollar dump, bond puke. Yet another Sell America re-run

The irony? The weekend tax deal was pitched as pro-growth, but in reality it’s just an expensive punt to extend the status quo—front-loading deficits in exchange for political optics. Growth won’t get a second wind from this bill. At best, it dodges a tax hike. At worst, it fans inflation expectations and pressures long-end yields higher, which in turn risks crowding out the very growth it claims to protect. With deficits still projected at 5–7% of GDP for the foreseeable future, the bond market might not blink forever.

We’ve been short USD/JPY since before the downgrade, and one would assume we trade down. The steeper curve and Japan’s increasingly vocal BoJ (Deputy Governor Uchida hinting again at liftoff) only add weight to the trade. Risk appetite is fading fast in Asia, and the yen’s safe-haven halo is starting to glisten again.

Zooming out, the FX market is in the middle of a structural pivot. This isn’t your old-school playbook of rate differentials and forward guidance. Now it’s about credibility—fiscal, institutional, and capital flow stability. The dollar may still dominate structurally, but the cracks are widening. Strong balance sheets and reshored supply chains are pushing EM Asia and select G10 pairs back into the spotlight. If capital continues questioning the USD's role as the ultimate safe harbor, we’re in for a sea change this year.

Mid-June’s TIC data will be a key pulse check on foreign flows. But watch the G7 in Canada too—if Treasury manages to sneak any FX language into the communique, especially around competitive devaluation, the dollar could face a larger leg down.

As I always tell anyone who asks where a currency’s headed over the next 12 months—usually expecting some Nostradamus call because I’ve got decades under my belt—I just shrug. Truth is, I hedge tail risks. That’s the job. And in this market, the much weaker dollar is the tail risk that many are underpricing.

Moody’s downgrade wasn’t a shock—but it’s a reminder. Fiscal rot doesn’t move fast, it erodes slowly—until suddenly it doesn’t. The dollar isn’t dead, but it’s no longer invincible. Add foreign divestment whispers and the very real possibility of structural capital outflows, and DXY support at 100.20 starts looking more like a target than a floor for this week.