Investing.com -- Moody’s downgrade of the U.S. isn’t really about default risk or runaway debt, Macquarie analysts argue, but a political critique of Washington’s inability to course-correct-one that threatens to usher in a prolonged period of “American malaise” and further erode the dollar’s already battered brand as policy uncertainty and ruptured economic norms weigh on global confidence.
“Moody’s downgrade is, effectively, a political assessment, as much as it is an economic one,” Macquarie analysts said in a recent note, highlighting that the agency’s move is less about the risk of outright default and more a signal of Washington’s inability to course-correct on debt and fiscal policy.
While the U.S. is hardly alone in facing a mounting debt burden, Macquarie warns it’s the dollar that stands to lose the most from the downgrade and the breakdown in economic diplomacy that’s marked recent months.
“It could still be the USD that suffers most from the trends that the Moody’s debt downgrade underscores, over time. The reason is that it is still the USD that has the most to lose, given the high perch from which it may begin its journey downward, and it is the currency that has undergone the largest adverse ’perceptions’ shift in the past few months, given the institutional rupture caused by the ’Liberation Day’ announcements.”
The chances of the U.S defaulting on its interest or principal debt payments, even in theory, is extremely slim because the "Fed can always bail out the US government, albeit through inflation," the analysts said. But that is "exactly the political critique" that can hurt the dollar, they added, as it is associated with "greater policy uncertainty, a rupture of economic-diplomatic norms, and adversely changing perceptions of the US’s ’brand’."
The downgrade has already pushed long-term Treasury yields higher, with the 10-year yield climbing above 4.50% as traders react to the news and foreign holders, including China, adjust their U.S. bond portfolios. Macquarie notes.
With the U.S. coming off a 12-year run of dollar strength, Macquarie warns that the transition to a period of “American malaise” could last five to eight years, with the greenback facing a prolonged period of underperformance as investors seek alternatives.