One swallow does not make a summer, however, Moody's recent decision to downgrade the United States from its top credit rating mirrors similar decisions from the two other major US ratings agencies, S&P and Fitch.
Currency market strategists see continued declines in store for the US dollar in the months ahead. A weak dollar could have implications for markets particularly on the eurozone and in Asia. Against the backdrop of tariffs, one notices a boost to US-based companies doing business in foreign markets since goods become cheaper abroad.
However, strategists don't expect the dollar to lose its status as a global reserve currency anytime soon. Analysts say that dire outcome isn't likely. The dollar plays a critical role in the global financial system, and "there are really no alternatives" explains Samuel Zief, head of global FX strategy at JPMorgan Private Bank. "No other currency or asset really compares to the US dollar in terms of its role in foreign exchange reserves, international trade settlement, invoicing, overall financial infrastructure and financial market trading."
Historically, the dollar's strength has rested not just on the size of America's economy, but also on the predictability of its institutions, its commitment to open markets and the global acceptance of American leadership. Over the past eight decades the dollar has withstood wars, recessions and financial meltdowns largely because successive American administrations preserved these fundamental commitments.
Yet, Moody's decision to downgrade it comes amid a tough fight in Congress to pass Trump's much-touted "big, beautiful" spending bill, aimed to revamp and renew a roughly $5 trillion extension of his 2017 tax relief, paid for, at least partially, through cuts to the Medicaid health insurance programme that covers more than 70 million low-income people. Following turmoil in the all-mighty bond market and a double-digit drop in US equities, Trump had to adjust course meaningfully by putting a 90-day pause on tariffs over and above the 10% base to allow for trade negotiations.
He showed signs to soften his trade stance on China. Could the dollar's weakness pave the way for steady growth in other currencies, particularly the euro? A lot depends on how Europe regroups its trade policy to take advantage of the situation. Across the Atlantic, the euro was designed to be more than a regional currency, starting from its inception in the 1990s. Its architects envisioned not only greater monetary stability and economic integration within Europe, but also a currency that could rival the dollar on the global stage.
On the first two counts, the single currency proved successful. The European Central Bank has established a credible monetary policy, even in the face of financial crises, the Covid-19 shock and the war in Ukraine. By eliminating both the direct transaction costs of exchanging national currencies and exchange-rate risk among member states, the common currency has enhanced trade between all members of the euro area. Considering the USA's heavy protectionist measures, these are threatening to undermine its fragile recovery.
The coming months will be critical in determining whether negotiations can ease the strain, or if the EU must prepare for even tougher economic headwinds. Good news was forthcoming last week following talks held between both the US and Chinese trade officials.
These culminated in a lowering of the US tariffs on Chinese goods from 145% to 30% while China reduced its tariffs on US products from 125% to 10%. As can be expected, there was a relief such that financial markets responded positively to the announcement. Unsurprisingly, it was a knee-jerk reaction as the S&P 500 rebounded, erasing losses of previous weeks and closing slightly higher than the levels seen at the start of the year. Can the euro ever take advantage of a weak dollar.
The EU bloc, which has repeatedly been accused of having "taken advantage" of the US, has been hit with three rounds of tariffs: a 25% tax on imports of steel and aluminium and cars, a 20% "reciprocal" tariff on all imports, which has been lifted while trade talks are ongoing. A "universal" baseline 10% tariff, however, remains in place. President Trump's proposed 50% tariffs on European Union goods would hit roughly $606 billion in imported products.
This hurts considering the US is the EU's largest trading partner, purchasing 21% of its exports. In the light of all this turbulence, one can be excused to ask will Malta's own export horizon be hit (not really, given the limited trade balance with the US). Will the low dollar value act as a deterrent to European exporters trying to reach countries other than the US? Sensible economists tell us; the euro cannot become an alternative to the dollar overnight. It must be supported by a stronger, more integrated and growth-oriented euro-area economy.
True, the block has been placing solid foundations, with a central bank digital currency in the pipeline which aims to foster innovations in payments, reducing dependence on foreign providers. In climate and energy, Europe remains committed to ambitious targets, which should leave it well placed to attract global green investment.
During the Trump economic challenges, one lauds euro-area leaders. They remain committed to stability, free markets, democracy and the rule of law. The race against the dollar is certainly, a challenge and so far, the euro scene seems to be in good shape, yet there needs more time for the dust to settle before we crack open the champagne. Back home, our economy is expected to sustain its growth momentum in 2025, driven by robust domestic consumption, tourists' revenue and positive net exports.
Following a notable 6% expansion in GDP in 2024, the economy is expected to grow by an exemplary 4.1% in 2025 and 4% in 2026. Good news follows on the deficit, which is set to decline to 2.8% of GDP in 2026, while the public debt-to-GDP ratio is expected to broadly stabilise.
While it is worth celebrating the euro's short-term resilience against the mighty dollar, credit must go to the Commission and all member states for standing firm and avoiding the risk of capitulation.
George M. Mangion is a senior partner at PKF Malta
gmm@pkfmalta.com