Core Viewpoint - The recent rebound of the US dollar is driven by favorable sentiment, but concerns over policy uncertainty and debt sustainability are shaking investor confidence in dollar assets [1][2] Group 1: Dollar Dynamics - The "Dollar Smile Curve" theory, proposed by economist Stephen Jen in 2001, suggests that the dollar strengthens under two extreme conditions: when the US economy outperforms others or during significant global economic and political uncertainty [2] - Historical data shows that since 1980, the dollar index has risen during 4 out of 6 US recessions, indicating some validity to the "Dollar Smile Curve" theory [5] - Current conditions have shifted, with US tariff policies and fiscal sustainability becoming key factors influencing dollar movements, leading to a potential "Dollar Frown Curve" [5] Group 2: Fiscal Concerns - The US debt has reached $36.21 trillion, accounting for 124% of GDP, with interest payments projected to exceed $1 trillion in the 2024 fiscal year [7] - Rating agencies, including Moody's, warn that the US is facing a structural dilemma of long-term deficits and political dysfunction [7] Group 3: Economic Uncertainty - The resilience of the US economy, a prerequisite for the "Dollar Smile Curve," is under scrutiny, with concerns about extreme tariff levels and rising inflation risks [8] - Prominent figures, including JPMorgan CEO Jamie Dimon and hedge fund manager Ray Dalio, caution that the market may be underestimating the long-term risks associated with trade policies and US debt [8][9] - The Federal Reserve is cautious about balancing inflation pressures and recession risks, with officials indicating a preference for a wait-and-see approach regarding interest rate adjustments [9]

Group 1 - The report from Bank of Singapore indicates that despite easing US-China trade tensions, the US economy's uncertain growth outlook and high fiscal deficit continue to exert structural depreciation pressure on the US dollar [1][2] - The report forecasts that the euro may rise to 1.23 against the dollar and the dollar may fall to 132 against the yen in the next 12 months due to weak economic conditions and reduced asset allocation by non-US investors [1] - The effective average tariff rate in the US has decreased from approximately 18% at the beginning of the year to nearly 8%, but remains significantly higher than the 2% to 3% levels seen before 2018 [1] Group 2 - Concerns about the sustainability of US fiscal policy are reflected in rising long-term Treasury yields, with government debt as a percentage of GDP returning to levels seen during World War II [2] - The forecast for the USD/CNY exchange rate has been adjusted from 7.40 to 7.10, reflecting improved US-China relations, although China is unlikely to favor a rapid appreciation of the yuan [2] - The report highlights the accumulation of risks associated with the US twin deficits (fiscal and current account), suggesting that unless US bond yields rise further, the dollar may struggle to attract sufficient external capital to maintain exchange rate stability [2]

Core Viewpoint - The downgrade of the US credit rating has significant and far-reaching implications for the US economic outlook, affecting various sectors including fiscal, financial, and monetary policies [1]. Fiscal Analysis - The deteriorating fiscal condition of the US is a key reason for the credit rating downgrade, with the federal budget deficit for FY 2024 exceeding $2 trillion and total debt approaching $35 trillion [3]. - This massive debt burden increases the government's repayment pressure, leading to a loss of investor confidence in US Treasury bonds, which will require higher yields as compensation for increased credit risk [3]. - Singapore Bank predicts that long-term US Treasury yields will rise over time due to concerns about fiscal sustainability and changes in market risk appetite [3]. Yield Forecast - Singapore Bank maintains its forecast for US Treasury yields over the next 12 months, predicting that the 10-year Treasury yield will reach 5.00% [4]. - This forecast reflects concerns about the US fiscal predicament and the uncertainty in the global macroeconomic environment, which increases the upward pressure on yields [4]. - A breach of the 5.00% threshold for the 10-year Treasury yield could significantly impact global bond market pricing, corporate financing costs, and household borrowing rates, potentially triggering a new round of global asset allocation adjustments [4]. Financial Market Impact - The downgrade threatens the safe-haven status of US Treasury bonds, aligning with Singapore Bank's view that the "dollar has peaked" [5]. - Historically viewed as one of the safest assets, the downgrade diminishes the perceived security of US Treasury bonds, prompting investors to reassess their asset allocations [5]. - A potential decline in demand for US Treasury bonds may weaken the attractiveness of the dollar, leading to downward pressure on the dollar exchange rate as international capital could accelerate outflows from the US market [5]. Monetary Policy Implications - The high fiscal deficit and persistent inflation pressures severely limit the Federal Reserve's policy options [6]. - To maintain debt sustainability, the US needs to issue Treasury bonds at lower interest rates to reduce financing costs, while inflation necessitates a tightening monetary policy to stabilize prices [6]. - The credit rating downgrade exacerbates this policy dilemma, potentially forcing the Federal Reserve to keep interest rates elevated for an extended period, sacrificing short-term economic growth for long-term stability [6].

Core Viewpoint - The recent downgrade of the U.S. sovereign credit rating by Moody's from Aaa to Aa1 highlights significant concerns regarding the country's fiscal sustainability, driven by rising budget deficits and interest costs [2][5]. Group 1: Rating Downgrade Impact - Moody's cited the U.S. government's massive fiscal deficit and increasing interest costs as reasons for the downgrade, indicating that the government's borrowing will accelerate, leading to higher long-term interest rates [2]. - This downgrade marks the first time the U.S. has lost its AAA rating from all three major rating agencies, with previous downgrades occurring in 2011 and 2023 due to fiscal concerns and rising debt levels [3]. - Following the announcement, U.S. stock futures fell significantly, with the Dow Jones index futures dropping over 250 points, and most Asian markets also experienced declines [1][4]. Group 2: Market Reactions - The downgrade is expected to increase volatility in U.S. equities, with analysts warning of potential short-term sell-offs in both the stock and bond markets [4][6]. - The 10-year U.S. Treasury yield approached 4.5% after the news, reflecting immediate market reactions to the downgrade [4]. - Despite short-term impacts, the long-term effects on U.S. equities may be limited due to their inherent self-correcting capabilities, although the credibility of U.S. debt may continue to erode [5][6]. Group 3: Long-term Fiscal Concerns - Moody's expressed skepticism about the effectiveness of current fiscal proposals to significantly reduce spending and deficits, suggesting that the U.S. may face a structural deficit of $4 trillion over the next decade if tax reforms are made permanent [5]. - The ongoing fiscal unsustainability of the U.S. has been described as a "tumor" in the international financial market, indicating deep-rooted issues that could undermine confidence in U.S. debt over time [5][6].