US: Downgrade unlikely to be long-lasting driver – ING

Markets were taken aback by Fitch's downgrade of US debt on Tuesday. Economists at ING analyze implications for the FX market.

Fitch downgraded the US from AAA to AA+

Fitch downgraded the US from AAA to AA+, with a stable outlook. EUR/USD jumped on the news, but high-beta currencies suffered, and the dollar seems to have been shielded by safe-haven demand.

Will this prove to be a driver for the FX market beyond the knee-jerk reaction? We doubt that. Treasury Secretary Janet Yellen described the downgrade as ‘outdated’, and markets will likely see it in a similar way (i.e. strictly tied to the debt ceiling standoff) especially in a week full of important data releases and with the next Federal Reserve rate hike hanging in the balance.

See: Rating changes no longer have the signaling effect that could trigger violent capital flows – Commerzbank