Dollar Weakens on U.S. Sovereign Rating Downgrade

The U.S. Dollar Index (DXY) is down 0.54% this week, falling to 100.14, while the EURUSD has surged 0.97% to 1.1270. This rebound aligns with positioning from large investors, who appeared to anticipate the move. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) reported net outflows of $2.6 million last week, following $18.3 million in outflows the week before.

EURUSD found strong support in the 1.1100–1.1200 range and has since reversed course, quickly reaching the key upside target zone of 1.1260–1.1360. While this zone represents a major resistance area, the current momentum suggests potential for further gains toward 1.1360 and possibly beyond.

Last week, the Dollar was initially buoyed by the reopening of U.S.–China trade talks and mutual tariff reductions. Despite unexpectedly soft U.S. inflation data in April, Fed Chair Jerome Powell maintained a hawkish tone, which pressured the EURUSD lower by 0.76% to 1.1160. However, sentiment quickly shifted after Moody’s became the last of the "Big Three" credit rating agencies to downgrade U.S. sovereign debt from AAA to AA1. This removed the U.S. from the elite group of countries with top-tier credit ratings, triggering a sharp Dollar sell-off and a 1.14% rally in the EURUSD to 1.1288. The gap left at 1.1160 on Monday’s open may be revisited, but not necessarily in the near term.

Looking ahead, U.S. manufacturing and services PMIs are due Thursday and are expected to show further deterioration. This may give the EURUSD additional lift toward the 1.1360 level.

The 1.1360 level remains a significant resistance area. A rejection here could trigger a corrective pullback, possibly filling the 1.1160 gap. However, investor sentiment should not be underestimated—especially given their foresight regarding China’s U.S. Treasury sell-off and the U.S. credit rating downgrade. A sustained break above 1.1370 would invalidate near-term bearish scenarios and open the path toward broader upside targets at 1.1650–1.1750.

Given recent developments, short Dollar positions require cautious management. Should EURUSD break and hold above 1.1370, further gains appear highly probable, and Dollar bulls may need to reassess exposure.