The ‘Sell America’ Undercurrent
Following Moody’s downgrade of US sovereign debt from AAA to AA1 late on Friday, long-term Treasury yields surged towards the symbolic 5% level—a clear signal that investors are now demanding a higher risk premium for holding US government bonds. Despite the rise in yields, the US dollar weakened broadly, underscoring growing concerns over fiscal sustainability and confidence in US assets.
This episode contrasts sharply with the 2011 downgrade by S&P during the so-called “fiscal cliff” crisis. Back then, inflation was subdued, and Treasuries remained the world’s ultimate safe haven. Today, the landscape is markedly different: inflation remains stubbornly high, policy direction appears erratic, and even US equity markets are flashing warning signs on valuations.
Indeed, for the first time in nearly a quarter of a century, the earnings yield on equities has fallen below the 10-year Treasury yield. Investors are accepting less compensation for holding riskier assets—an inversion of the typical relationship—suggesting US equities may be overvalued and under-compensating relative to bonds.
However, bonds offer little comfort either. The recent rise in yields has been driven largely by the term premium, the extra return investors demand to hold longer-dated debt in uncertain conditions. This is not a bullish signal; rather, it indicates that Treasuries themselves are being perceived as increasingly risky.
In essence, equities look overpriced, bonds look volatile, and the dollar has taken a hit—dropping nearly 1% since the downgrade, with weakness visible against most major currencies.
The broader message is clear: risk appetite for US assets is deteriorating. This is the essence of the growing “Sell America” narrative. While near-term dollar strength may persist due to interest rate differentials, the medium-term outlook appears softer.
Looking ahead, Moody’s downgrade is likely to dominate market discussions this week. Scheduled US economic data—including jobless claims and PMIs—are unlikely to move the needle materially. However, if trade talks continue to make headway and global openness to trade remains intact, positive surprises in data could quietly support a dollar rebound later this year.
Euro Strengthens as Confidence Builds
The euro edged higher towards $1.13 on Monday, extending its recovery from recent one-month lows, bolstered by broad-based dollar weakness following Moody’s downgrade of US credit. ECB President Christine Lagarde supported this momentum, framing a stronger euro not as a threat but as an “opportunity”, attributing the currency’s rise to shifts in global capital flows and waning confidence in US policy direction.
Her comments struck a chord with investors. Long-dated euro call options are gaining traction, and one-year risk reversals have risen above shorter-dated equivalents—an indication that markets view the euro’s recent rebound as more than a temporary bounce.
Technically, the EUR/USD pair still needs to decisively clear its 21-day moving average to confirm the uptrend. However, its first close above the 55-month moving average since 2021 signals growing conviction in the currency’s outlook. The missing catalyst for a push towards $1.20 may not be headline-driven, but instead lie in steady reserve diversification, policy credibility, and the ECB’s relative stability.
On the data front, attention today turns to Eurozone consumer confidence figures, expected to show the first improvement in three months—potentially adding another tailwind to sentiment.
Sterling Rises, But Political Shift Unlikely to Be a Game-Changer
The pound climbed towards $1.34 on Monday, approaching a seven-month high, buoyed by both encouraging UK data and a modest political breakthrough in UK-EU relations. While the GBP/EUR cross remains broadly unchanged just below the €1.19 level, sterling is still up around 1% for the month and trading above long-term average rates.
