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EUR/USD surged to around 1.1250 in Tuesday’s North American session on May 20, 2025, as the US dollar buckled under a Moody’s credit downgrade and renewed US-China trade friction. The US Dollar Index (DXY) slid toward 100.00, reflecting fears over America’s ballooning $36 trillion debt and tariff uncertainties. Meanwhile, a strengthening euro, buoyed by stable EU inflation forecasts, adds fuel to the rally. The Federal Reserve must act decisively to restore dollar confidence, but escalating trade risks demand a cautious approach.
US Credit Downgrade Shakes Markets
Moody’s cut the US sovereign credit rating to Aa1 from Aaa on Friday, spotlighting a $36 trillion debt pile and fiscal imbalances. This downgrade, coupled with President Donald Trump’s proposed $3 trillion to $5 trillion spending bill, has raised alarms about rising capital costs. The dollar’s credibility, already strained by inconsistent tariff policies, faces further scrutiny. Markets fear sustained deficits could erode trust in the greenback, echoing the 2011 debt ceiling crisis that rattled global confidence. The Fed, led by Chair Jerome Powell, now faces pressure to signal stability without tightening too aggressively.
Trade Tensions Flare with China
US-China trade de-escalation hopes dimmed as Beijing criticized Washington’s stance on Huawei-made AI chips. A Chinese Commerce Ministry spokesperson called US export controls “discriminatory,” arguing they undermine a recent Geneva trade agreement. Trump’s tariff rhetoric, including potential levies on Chinese goods, adds volatility, weakening the dollar further. The 2018 trade war, which shaved 1% off global GDP, serves as a warning: missteps could disrupt supply chains and fuel inflation, complicating the Fed’s balancing act.
Euro Strength Bolsters Rally
The euro’s resilience supports EUR/USD’s climb, despite EU warnings of inflation undershooting the European Central Bank’s 2% target. The EU’s spring forecast projects 1.7% inflation in 2026, driven by lower energy costs and a stronger euro. ECB officials, noting disinflation progress, advocate for rate cuts, though US tariffs pose medium-term inflation risks. Thursday’s HCOB PMI data, expected to show faster EU business activity, could further lift the euro. In contrast, steady US S&P Global Composite PMI growth may not offset dollar weakness if trade and debt concerns persist.
Powell must navigate a treacherous landscape. A dovish pivot risks inflation spikes, while hawkish moves could deepen economic strain. Investors await US PMI data and ECB signals to gauge EUR/USD’s staying power. Historical trade disputes show that clarity in policy restores trust—Powell should prioritize transparent, data-driven decisions to counter tariff noise and fiscal fears. For now, the euro’s strength and dollar’s woes signal more upside for EUR/USD, but volatility looms without decisive action.
