Dollar slips after US credit downgrade, Aussie edges higher before RBA

The US dollar dipped to a one-week low versus the safe-haven yen on Monday as markets digested a surprise downgrade of the US government's credit rating and as trade friction concerns weighed on sentiment.

Australia's dollar turned higher following three days of declines ahead of Tuesday's Reserve Bank of Australia policy announcement, with a quarter-point cut widely expected.

Moody's cut the United States' top sovereign credit rating by one notch on Friday, the last of the major ratings agencies to downgrade the country, citing concerns about its growing US$36 trillion debt pile.

The news saw the dollar turn lower against its major rivals following four straight winning weeks when it was boosted by rising optimism for US trade deals and then a thaw in relations with China that eased fears of a global recession.

The greenback slipped as much as 0.6 per cent to 144.80 yen for the first time since May 9 on Monday, while the euro gained as much as 0.3 per cent to US$1.1199.

"While the decision itself is seen as a catch-up to S&P's move on 5 August 2011 and Fitch's announcement to do the same on 1 August 2023, Moody's decision could still feed USD bears," said Paul Mackel, global head of FX research at HSBC.

"Given this rating erosion has been slow moving, the simple takeaway is Moody's step should not matter for the USD. But one needs to be careful with this assumption."

US Treasury Secretary Scott Bessent said in television interviews on Sunday that President Donald Trump will impose tariffs at the rate he threatened last month on trading partners that do not negotiate in "good faith."

However, a Financial Times report that the United States had begun serious trade talks with the European Union, breaking a long deadlock, offered some hope for additional deals after Washington inked a framework agreement with Britain earlier this month.

Trump has previously said he has potential deals with India, Japan and South Korea as well, although talks with Tokyo seem to be stumbling over car tariffs.

In the market, "there's a lot of complacency about the ability to pull off deals," said Ray Attrill, head of FX strategy at National Australia Bank.

"Confidence that the US economy is going to weather this is very much open to question."

Trump cleared a hurdle towards passing a sweeping tax cut bill that would add an estimated US$3 trillion to US$5 trillion to the nation's debt over the next decade, after winning approval from a key congressional committee.

The dollar declined 0.2 per cent to 0.8358 Swiss franc, another safe-haven currency. Sterling added 0.1 per cent to US$1.3297.

"The focus on US growth risks and the US administration's policy agenda may have put the US safe-haven status in question," said Mahjabeen Zaman, head of foreign exchange research at ANZ.

The Australian dollar edged up 0.1 per cent to US$0.6413 after sliding more than 1 per cent over the prior three sessions.

Markets have priced in a certainty of a quarter-point cut to the RBA's 4.10 per cent cash rate on Tuesday, as slowing inflation allows policymakers to respond to rising global risks.

The central bank's guidance will be key, as investors have reduced their expectations for rapid-fire rate cuts in the coming months following the Sino-US tariff truce and robust Australian employment data.

New Zealand's kiwi dollar rose 0.2 per cent to US$0.5890.

Bitcoin briefly jumped as much as 2.8 per cent to reach US$107,060.46 for the first time since January, the same month that the token notched its all-time peak of US$109,071.86.

Read More: Here