The fall of the dollar as a reserve currency: reality or exaggeration?

In recent weeks, the dollar has lost strength against other currencies, pressured by fiscal uncertainty and doubts about the sustainability of U.S. debt. 

Table of contents

1. Introduction

2. The downgrading of the U.S. debt rating   

3. Recent fall of the dollar: causes and context  

4. Stagflation: the ghost that returns    

5. Summary table

Introduction

Moody's, the last major agency to maintain the highest rating (Aaa) for the U.S. -like the one still held by Germany or Switzerland- downgraded the U.S. rating to Aaa. downgraded its rating to Aa1, the same level as countries such as Ireland and South Korea.

And although Donald Trump has promised spending cuts, the deficit would remain high because of growth in some budget items budget items. At the same time, fears of stagflation are spreading. All this revives an underlying concern: is the dollar losing its privileged status in the global economy?

The downgrading of the U.S. debt rating

Moody's is one of the three main credit rating agencies in the world, along with Standard & Poor's (S&P) and Fitch. These agencies assess the ability of countries and companies to meet their debt payments. Their rating directly influences investor confidence and the cost that issuers must bear to finance themselves. must assume in order to finance themselves.. The better the rating, the lower the perceived risk and, therefore, the cheaper it is to borrow.

Last May 16, 2025, Moody's downgraded the credit rating of the United States from Aaa (highest possible rating) to Aa1, The main reason for this downgrade was the deteriorating public finances and and the sustained increase in indebtedness. With this decision, the US loses its last major "triple A", since S&P downgraded it in 2011 and Fitch did the same in 2023. Moody's warned that, even with fiscal adjustment proposals, the burden of debt interest and the growth of spending on items such as healthcare and pensions will keep the deficit at high levels.

Rating agencies have a great deal of weight in the value attributed to a currency.

This downgrade means that investors will demand higher yields (coupon) to take on the risk of lending money to the U.S. lending money to the U.S.. which makes it more expensive to finance. It also weakens the dollar's image as a safe haven asset, affecting its international credibility. Although the United States continues to have a solid economy, this decision casts doubt on its ability to control its long-term debt, something that the markets have already begun to reflect, punishing the dollar with a depreciation against the euro of 1.47% since the announcement until today..

Recent fall of the dollar: causes and context

Since Moody's announced the downgrade of the U.S. credit rating on May 16, the dollar has fallen sharply against several key benchmarks. In just six days, it has lost 1.5% against the euro, 0.85% against sterling and 4.25% against gold. 4.25% against gold. Although gold is not a currency as such, it tends to function as a thermometer of confidence in the markets: when it rises, it reflects risk aversion and doubts about monetary stability.

Adding to this pressure is the possibility that the Federal Reserve may be forced to accelerate interest rate cuts, not so much because of recent weak economic growth, but to prevent U.S. bond yields from rising further after the downgrade. For example, for example, the yield on 20-year US bonds has risen to 5.118 has risen to 5.118%, up 4.45% since the downgrade.rising 4.45% since Moody's announcement. This increase makes the cost of borrowing more expensive for the country, which could force the Fed to lower rates to contain those costs, or expose the US to a scenario where borrowing becomes increasingly difficult.

Since the dollar is the world's main reserve and trading currency, its depreciation affects us all. A persistent inflation in the U.S. can be passed on to other countries via import prices, generating imported inflation on a global scale.

Stagflation: the ghost that returns

Stagflation is an unusual and feared economic scenario that combines weak or no growth with persistent high inflation. This phenomenon is particularly difficult to deal with because the classical tools of monetary monetary policy seem to contradict each other: raising rates to control inflation can further stifle growth, while lowering them to stimulate the economy can fuel inflation.

Currently, several factors point to a growing risk of stagflation in the United States and globally. Economic growth is showing signs of slowing, while inflation remains "sticky" at elevated levels. In addition, both the public and private indebtedness and private borrowing continue to rise, adding to the vulnerability of the financial system. JPMorgan CEO Jamie Dimon has recently warned of this threat, noting that the U.S. economy could face "a perfect storm" of persistent inflation and low growth.

The risk of stagflation casts doubt on the strength of an economy as important as that of the United States.

The last time the United States faced a stagflation scenario was in the 1970s. the 1970s, when a sharp rise in oil priceswhen a sharp rise in oil prices triggered inflation while the economy stagnated. Although the current causes are different, this historical crisis serves to exemplify how complex it is to emerge from an environment of high inflation and low growth. high inflation and low growth. The stagflation of that era lasted nearly a decade and posed a major challenge for the Federal Reserve, which had to balance controlling inflation - through aggressive interest rate hikes - without triggering too deep a recession that could stifle economic recovery. Moreover, at that time the dollar did not face the international competition it does today, which helped maintain solid demand in the international currency market despite inflation. In the current context, with other currencies gaining ground, it would be even more complicated to reverse the situation without affecting the credibility and value of the dollar.

Conclusion

The recent drop in the dollar and the downgrade of its credit rating are certainly bad indicators that may have significant consequences, such as increased difficulty for the U.S. to finance itself and additional pressure on global inflation. However, it is important to remember that markets tend to be skittish, overreacting to negative news. to negative news. Although the dollar seems to be gradually losing hegemony, these processes tend to be slow and do not happen overnight.

In recent decades, although at various times the definitive decline of the U.S. economy and the loss of its economic leadership was announced economic leadershipThe United States has shown remarkable resilience and capacity for recovery. This does not mean that difficult times are not ahead for the dollar and the U.S. economy, but it is advisable to moderate alarmism and closely follow all the news that comes out in this regard.

Summary table 

Introduction	-Fiscal uncertainty. -Downgrading.
The downgrading of the U.S. debt rating	-The credit rating. -Increased investor requirements.
Recent fall of the dollar: causes and context	-Decline of the dollar against other currencies. -Lower interest rates.
Stagflation: the ghost that returns	-Zero growth and high inflation. -Last precedent in the United States.

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