19. 5. 2025 - Josef Brynda
On Friday, May 16, 2025, Moody’s Investors Service downgraded the United States’ credit rating from the highest level Aaa to Aa1. For the first time in over a century, the U.S. has lost its last remaining top-tier credit rating from the major rating agencies. The downgrade is attributed to persistent high fiscal deficits, rising debt servicing costs, and the inability of political leaders to implement effective measures to stabilize public finances.
According to Moody’s, U.S. federal debt has reached $36 trillion and could grow to 134% of GDP by 2035. The agency also warns that interest payments could consume up to 30% of federal revenues by then. Moody’s criticized both current and past administrations for their lack of fiscal discipline and political unwillingness to address the structural imbalance between revenues and expenditures.
Markets reacted negatively to the announcement. Futures on U.S. stock indices fell—S&P 500 by 1.2%, Dow Jones by 0.8%, and Nasdaq by 1.22%. Yields on 10-year Treasury bonds rose to 4.54%, and 30-year yields exceeded 5%, all during the Asian trading session. The U.S. dollar weakened against major global currencies, while gold prices increased by 0.8% to $3,213 per ounce. European and Asian equity markets also recorded losses.
The Treasury Department, led by Scott Bessent, called the Moody’s move a “delayed indicator” that merely confirms existing issues. It blamed the previous Biden administration for excessive government spending. In contrast, Democrats criticized the proposed “One Big Beautiful Bill”, which would extend the 2017 tax cuts and, according to estimates, increase the deficit by more than $3 trillion over the next decade.
The downgrade increases the perceived risk of U.S. Treasury bonds, meaning investors will demand higher yields as a risk premium. This could make borrowing more expensive not only for the federal government but also for the private sector, including mortgages, consumer loans, and corporate bonds. The result may be a broad tightening of financial conditions across the economy.
During the European session, the U.S. dollar weakened against major currencies, falling by more than 1% against the euro. Investors are increasingly considering a shift to alternative safe-haven assets, such as the Swiss franc or gold, which undermines the dollar’s status as the world’s primary safe haven. This trend may continue if concerns over the U.S.'s debt sustainability persist.
On the other hand, rising U.S. bond yields increase the real interest rate differential relative to other currencies, which could support the dollar. The result may be a mixed and volatile outlook, heavily influenced by market expectations surrounding future Fed actions and U.S. fiscal policy. According to Fed officials and underlying economic data, the economy is not currently operating below its potential—the labor market remains strong, GDP growth is projected to rebound in Q2, inflation is relatively contained, and interest rates remain elevated.
The downgrade comes at a time of growing fiscal uncertainty and rising debt service costs. In the long term, this could lead to permanently higher borrowing costs for both the government and private sector and erode investor confidence in U.S. assets. Nevertheless, U.S. Treasuries remain a key safe-haven asset in times of global turmoil, which may mitigate the impact of the rating downgrade.
However, for the Treasury market to stabilize, fiscal measures from the Trump administration will likely be necessary, and are expected to arrive sooner or later. A critical factor going forward will be how fiscal policy addresses the debt brake and whether it manages to restore market confidence in U.S. public finances.
14. 5. 2025 - Josef Brynda
The Direction of the U.S. Dollar Following the Latest CPI Data Release
Yesterday's inflation data from the United States surprised the markets. The year-over-year Consumer Price Index (CPI) came in lower than analysts had expected, both in headline and core components. Consumer prices rose at a slower pace, temporarily easing market concerns about persistent inflationary pressures. This development had an immediate impact on the EUR/USD exchange rate, which returned to levels reminiscent of the temporary 90-day trade truce between the U.S. and China. This market reaction was, to some extent, anticipated following the data release.
However, the question remains: is this the beginning of a longer-term weakening of the dollar, or merely a short-term fluctuation?
Based on the comments of Federal Reserve Chair Jerome Powell and the overall tone of the latest FOMC meeting, it can be expected that the dollar may strengthen again in the longer term. Powell emphasized the ongoing robustness of the labor market and overall economic performance. He did not signal a shift toward aggressive rate cuts—only up to two rate reductions are expected by the end of the year. This continues to create a positive interest rate differential compared to most other currencies and supports demand for the U.S. dollar.
Another key factor is the development of Gross Domestic Product (GDP). In the first quarter, the U.S. economy experienced an unexpected contraction. However, this was largely due to a one-off surge in imports, as American companies stockpiled goods in anticipation of potential new tariffs. Since GDP is calculated as the sum of consumption, government spending, investment, and net exports (NX = exports – imports), the sharp increase in imports led to a decline in net exports, thereby dragging down GDP growth. This effect is expected to be temporary.
Analysts therefore anticipate a return to GDP growth in the second quarter, which should once again reinforce confidence in the strength of the U.S. economy—and, by extension, the dollar. Unemployment remains low, which is another indicator of economic resilience. Given the direct link between GDP growth and the labor market, there are grounds to expect continued economic expansion.
Despite the recent easing of inflationary pressures, the Fed’s stance remains cautiously restrictive. If inflation stays elevated or starts to rise again, a prolonged period of stable interest rates cannot be ruled out—which would help prevent further dollar weakening.
In addition to macroeconomic fundamentals, improving market sentiment also plays a role. Donald Trump’s ongoing negotiations with key trade partners and the generally positive performance of financial markets (with equity indices posting gains since the start of the year) support optimism about future growth. This sentiment often spills over into the strength of the national currency.
Conclusion:
The recent weakening of the U.S. dollar following the lower CPI data appears to be a short-term market reaction. From a longer-term perspective, the U.S. economy remains fundamentally strong, the labor market is stable, and the Fed continues to adopt a cautious approach. The expected rebound in GDP in the second quarter, combined with relatively high interest rates compared to other countries, should continue to provide support for the U.S. dollar throughout the remainder of the year.
12. 5. 2025 - Josef Brynda
Today, May 12, 2025, the United States and China announced a significant agreement to reduce tariffs for a 90-day period, marking a major step toward easing tensions in the ongoing trade conflict.
Key Points of the Agreement:
Market Reaction:
Background:
Outlook:
While seen as a positive step, analysts caution that this is only a temporary measure. Structural imbalances and deeper strategic issues remain unresolved. The next three months will be critical in determining the future of U.S.-China trade relations.
24. 4. 2025 - Josef Brynda
During his time in politics, Donald Trump repeatedly expressed, and the media frequently highlighted, his intent to lower the value of the U.S. dollar. His logic was straightforward: a weaker dollar improves the export competitiveness of the United States and simultaneously reduces the real cost of repaying U.S. government debt denominated in dollars. At first glance, it may seem that he has succeeded, indeed, the dollar weakened during certain periods.
However, the situation is far more complex. In June of this year, the United States faces a significant government bond repayment, where the effects of a weaker dollar were theoretically expected to be most apparent. Yet one crucial factor that Trump either overlooked or failed to influence in the long term is the yield on U.S. Treasury bonds.
While the early stages of his leadership saw a decrease in Treasury yields, the second half of his current term has been marked by a sharp rise in those yields. This increase has significantly raised the cost of servicing the national debt, regardless of whether the dollar is weak or strong. When yields rise, both new bond issuances and refinancing of existing debt become more expensive for the government.
Inflation and the Fed’s Response: A weaker dollar contributes to inflation by making imported goods more expensive. In response, the Federal Reserve has adopted a hawkish monetary stance, which further drives up bond yields and complicates debt management.
Investor Confidence: Rising yields also reflect a loss of investor confidence in the long-term fiscal stability of the United States. The weak-dollar policy may be perceived as short-term populism, but from a macroeconomic perspective, it is risky.
Dollar Weakness vs. Geopolitical Stability: A declining dollar undermines the international status of the U.S. dollar as the world’s primary reserve currency, which over time reduces the U.S. government’s ability to finance deficits more cheaply than other nations.
Trump’s attempt to weaken the dollar may have provided short-term benefits for exporters. However, when it comes to managing national debt, the strategy appears insufficient. In fact, rising Treasury yields may have the opposite effect, increasing debt servicing costs, boosting inflationary pressure, and raising credibility risks for the U.S. economy.
15. 4. 2025 - Josef Brynda
In recent days, we have witnessed developments in financial markets that often contradict traditional economic models. A typical example is the aftermath of the start of trade wars many economists assumed that the imposition of tariffs would lead to a strengthening of the domestic currency. The logic was simple: higher prices for foreign goods would reduce demand for them, while demand for domestic production would rise. This should mean less pressure to exchange domestic currency for foreign currency and an improvement in the trade balance. However, reality often shows a different outcome.
Let’s imagine that you plan to produce 50 cars in 2025, which is 10 more than last year. With this growth plan, you approach investors, who appreciate the ambition and provide capital. However, if import tariffs cause costs to rise, you might be able to temporarily increase prices and benefit from higher demand for domestic products, but the situation can quickly change. If foreign partners respond with their own tariffs, the entire plan may collapse. Modern economies are highly interconnected, and final products often consist of components from various parts of the world. History shows that trade wars have no clear winners.
Investors support companies with a clear and stable plan. However, if a company frequently changes its strategy, investor confidence drops, and they begin seeking safer investments. This doesn’t apply only to companies, but to states as well. If investors lose trust in a country's fiscal policy, they begin selling off its bonds, which can lead to financing issues. An example is the United Kingdom in 2022, when a loss of investor confidence led to a sell-off of government bonds and market turbulence.
For an economy like the United States, which heavily relies on debt, the loss of investor trust is particularly risky. For instance, China, one of the largest holders of U.S. government bonds, has apparently begun selling them off in large volumes. According to economic models, it should still be profitable for China to hold on to these bonds, higher interest rates in the U.S. should make them attractive. However, if political decision-making prevails over economic logic, models stop working because their fundamental assumptions (stability, rational behavior) no longer hold true.
Economic models are neither outdated nor flawed. Their problem lies in being built on certain assumptions, such as a stable environment, rational behavior of actors, and predictable policy. If these assumptions stop being valid, the models no longer reflect reality. The greatest risk of today’s world thus doesn’t lie in the models themselves but in the fact that the world they aim to describe is becoming increasingly unpredictable and unstable.
Overall, it will be very interesting to watch how the situation unfolds. If the U.S. dollar is to remain a safe haven, the United States must issue a strong statement outlining a clear plan and improving trade conditions. Continued chaos could further discourage investors from holding American assets.
8. 4. 2025 - Josef Brynda
Is modern economics returning to the days of mercantilism? Has Adam Smith been forgotten?
In an era marked by rising geopolitical tensions, disrupted supply chains, and mounting pressure to protect domestic markets, these questions seem more relevant than ever. Voices calling for tariffs, import restrictions, and economic self-sufficiency are growing louder – even at the cost of higher expenses and reduced efficiency. It all sounds familiar. As if we were stepping back into the 16th to 18th centuries, to a time when a nation’s wealth was measured by the amount of gold in its treasury and economic policy revolved around tight trade controls.
Mercantilists believed that prosperity stemmed from a positive trade balance – exporting more than importing. States supported exports, imposed tariffs, and discouraged foreign imports to "keep wealth within." Yet this logic often led to market distortions, reduced competitiveness, and stagnation in innovation. And today, in the 21st century, similar strategies are once again being adopted. How else can we describe the reciprocal tariffs between the U.S. and China if not as a return to the principles that Adam Smith so strongly criticized?
It was Smith, the Scottish philosopher and economist, who revolutionized economic thinking in 1776 with his landmark work The Wealth of Nations. He argued that real wealth lies not in hoarding precious metals, but in productivity and the freedom of exchange. Free trade, division of labor, and comparative advantage – where each nation specializes in what it does best – increase overall prosperity. His ideas laid the foundation for classical liberal economics and inspired the economic policies that fueled unprecedented growth in the 19th and 20th centuries.
Yet today, economic rationality seems to be fading once again. Instead of embracing open markets, governments turn to "protecting domestic industries," "ensuring strategic independence," or "defending national security." In reality, this often leads to higher consumer prices, limited choices, and disruption of the flows that modern economies depend on. In trying to protect local industry in the short term, long-term economic health may be sacrificed – a lesson history has already taught us.
Perhaps we truly have forgotten Adam Smith. Or perhaps economic decisions are once again being held hostage by populist moods and political grandstanding. But that is exactly why his ideas deserve renewed attention – not as dogma, but as a framework for maintaining stability and prosperity in a deeply interconnected world. The question is not merely whether free trade works. The question is whether we are willing to uphold its principles even in times of uncertainty.
So what would actually happen if a tariff truce really came into effect?
After all, we saw a glimpse of this just yesterday, when a report surfaced – now known to be fake news – suggesting that a 90-day tariff truce was being planned. At the time, however, the information seemed credible, and U.S. indices reacted immediately and positively. For instance, the S&P 500 reversed within minutes from a loss of around -3.5% to a gain of approximately +3.5%, clearly showing how sensitive markets are to any sign of easing trade tensions.
Moreover, lifting tariff measures could reopen some of the disrupted trade channels and thereby reduce – as Adam Smith already described – forced cost components. In other words, artificially created barriers that distort the natural flow of goods and services. It's also important to point out that, in today’s context, where the world’s largest economy is facing a potential recession due to the trade war – with Goldman Sachs putting the odds at up to 45% (Reuters, 2025-04-07) – this becomes a serious issue for the central bank as well.
While the Fed today is relatively well equipped to deal with consumer-driven (demand-pull) inflation through interest rate hikes, cost-push inflation presents a much trickier challenge. The economy may be operating below its potential output, yet price levels are still rising. In such a moment, the central bank faces a dilemma between two evils: either sacrifice price stability in favor of low interest rates to support growth, or sacrifice economic output by raising rates to fight inflation, even at the cost of slowing the economy further.
Another major risk – and certainly not a minor one – is the unpredictability and chaos in the implementation of trade policies. In recent days, it has practically become a routine for the U.S. administration to treat tariffs like a light switch – imposed today, repealed tomorrow, recalculated the day after based on some mysterious formula that lacks both logic and economic rationale. This inevitably creates an environment of uncertainty, where companies are unable to plan ahead. And failing to meet financial targets can cost firms not only in terms of stock market losses but also investor confidence.
This raises a fundamental question: Could this chaos ultimately drive American companies to leave the country, rather than attract foreign firms back to the U.S., as Donald Trump originally intended?
Historically, trade wars have never had real winners. For us economists, such a move in today’s world is truly perplexing – and at times even absurd.
So should we fear that modern economics is turning its back on principles that were long ago disproven?
7. 4. 2025 - Josef Brynda
The report that President Donald Trump is considering a 90-day pause on tariffs could have an immediate positive impact on global financial markets. Investors may interpret this move as a signal of easing trade tensions, which have significantly influenced international trade and stock market performance in recent years. Stock indices such as the S&P 500 or Nasdaq could experience gains, as markets tend to respond sensitively to any signs of improvement in trade relations between the United States and other countries.
After the announcement, we saw gains in the S&P 500, but those gains were later erased. Many would assume this should be a clear relief for the market, but in today's environment — and given the mood of investors who are extremely cautious about such statements — things are different. This is especially true considering the White House tends to change its messaging from minute to minute. The key will be to watch what this afternoon brings.
On the financial markets, this could — I emphasize could — be a positive sign for the USD. A statement like this might delay expectations for the Fed to start cutting interest rates, which have recently been lingering in the air and were, to some extent, already being priced in by investors.
One of the major problems with a trade war — aside from the current situation that creates overall uncertainty — is the rising input costs for businesses. In response to that, the Fed might normally consider cutting interest rates to alleviate the rising costs for businesses and thereby potentially support economic growth. However, tariffs are precisely the kind of tool that pushes prices higher, and in that case, the Fed tends to react with a more hawkish stance — that is, by tightening monetary policy rather than easing it. In such circumstances, a rate cut would likely not be on the table.
So the big question these days is whether the Fed will prioritize price stability or instead choose to favor economic and monetary support.
26. 3. 2025 - Josef Brynda
As we mentioned earlier, fears of a recession in the U.S. appear to be somewhat overblown. Today's data showed that durable goods orders are near record highs this year, indicating strong consumer and business demand. At the same time, the labor market remains stable and resilient.
A key factor in confirming this positive trend will be tomorrow’s GDP data, which could provide a clearer picture of the overall health of the U.S. economy. Another supportive signal comes from Donald Trump's statement regarding reciprocal tariffs, which are set to be more specifically targeted at selected segments on April 2. This move could help ease concerns about escalating trade disputes and, in turn, reduce fears of a recession.
Overall, despite some uncertainties, economic data continues to point to solid fundamentals that should prevent a significant slowdown in economic growth.
19. 3. 2025 - Josef Brynda
The dollar strengthened against major global currencies this morning in anticipation that interest rates will remain unchanged, according to CME Group. Its strength was also supported by weaker-than-expected data from the eurozone regarding the consumer price index. On the other hand, the approval of the stimulus package did not provide significant support to the euro, possibly because the Greens are demanding that part of the planned fund be invested in environmental innovations, which investors in Europe often perceive as a negative factor.
At the same time, yesterday's data from the U.S. almost ruled out concerns about a current recession, as industrial production showed a growth of around 0.7%. Additionally, labor market data also indicate stability. Overall, it can be said that U.S. fundamental data remain strong, but investor sentiment has been unsettled due to the unpredictability of government policy. The foreign exchange market is currently experiencing ideal yet often difficult-to-predict movements.
As I mentioned earlier, it will be crucial to follow Jerome Powell’s speech today at 19:00, where he will comment on the current and future economic outlook. Based on observed data, it can be assumed that Powell will not rush into further rate cuts this year, and we rather expect only two reductions, provided that the economy demonstrates resilience. These cuts could then lead to a neutral interest rate.
However, more than ever, it is now essential to monitor investor sentiment. Market sentiment has recently pushed the euro up by approximately 5% against the dollar.
18. 3. 2025 - Josef Brynda
Today, March 18, 2025, an extraordinary session is taking place in the German Bundestag, where lawmakers are debating a comprehensive financial package aimed at strengthening defense and investing in infrastructure. This package includes a reform of the so-called debt brake, a constitutional measure limiting the country's debt, with the goal of enabling higher defense spending. The proposal has been put forward by the parties of the likely new governing coalition, the conservative CDU/CSU alliance and the Social Democratic Party (SPD), and they are also negotiating support with the Green Party.
The proposal includes the creation of a €500 billion investment fund, which would be used for infrastructure modernization, such as roads, railways, and energy networks. This fund would be financed through loans, which requires an amendment to the existing debt brake. A two-thirds majority in parliament is needed to approve these changes, which is why intense negotiations with other parties are taking place.
The future chancellor, Friedrich Merz, has emphasized the necessity of this step in response to current geopolitical threats and the need to strengthen the defense capabilities of Germany and Europe. He also pointed to the weakening alliance with the United States under President Donald Trump, which increases the need for European defense autonomy.
We can say that if German debt leads to economic growth and higher inflation, the ECB may raise interest rates. Higher rates attract investors and strengthen the euro. Additionally, capital inflows into Europe and expectations of increased demand can further push the euro higher.