Stocks and the U.S. dollar slipped on Monday following a late Friday decision of credit rating agency Moody's to strip the U.S.' last gold standard sovereign bond rating over a debt pile that could balloon further.
The move dealt a blow to markets, which had enjoyed a healthy run-up last week after Washington and China hammered out a deal to temporarily slash tit-for-tat tariffs.
Asian equity markets closed lower, with losses mirrored in European midday deals and U.S. futures trading.
The dollar slid 1% against the euro and fell heavily against the British pound and yen.
The European single currency powered ahead despite the European Union cutting its 2025 growth forecast for the eurozone, blaming the move on U.S. tariffs.
Focus was also on a landmark EU-Britain summit five years after the latter's acrimonious exit from the neighboring bloc.
Events across the Atlantic weighed on oil prices, which were down almost 1.5%.
Gold, seen as a safe haven investment, jumped 1% in value.
Moody's downgrade, which came late Friday, "has weighed on U.S. equity futures, which are sharply lower on Monday, and it has also knocked the U.S. dollar," noted Kathleen Brooks, research director at XTB trading group.
After a market rout sparked by President Donald Trump's Liberation Day tariffs bazooka, investors have in recent weeks raced back to buy up beaten-down stocks as the White House tempered its hardball tariff approach.
However, selling returned after Moody's cut its rating on U.S. debt to "Aa1" from "Aaa," noting "the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns."
It added that it expected federal deficits to widen to almost 9% of economic output by 2035, from 6.4% last year, "driven mainly by increased interest payments on debt, rising entitlement spending and relatively low revenue generation."
Analysts said the cut – which follows S&P in 2011 and Fitch in 2023 – could indicate investors will want higher yields on Treasuries, pushing up the cost of government debt. Yields rose on Monday.
Treasury Secretary Scott Bessent dismissed the announcement, saying it was "a lagging indicator" and blaming Trump's predecessor, Joe Biden.
The news added to a frustrating time for Trump as his "big, beautiful bill" to extend tax cuts from his first term and impose new restrictions on welfare programmes has faced scrutiny in the Republican-controlled Congress.
Independent congressional analysts say the package would add more than $4.8 trillion to the federal deficit over the coming decade.
The bill cleared a key hurdle Sunday, progressing out of the House Budget Committee after several Republican lawmakers holding up the legislation dropped their opposition after it was blocked on Friday.
Republican Congressman Josh Brecheen, however, said the legislation "still required tweaking."
Congressman French Hill, who chairs the House Financial Services Committee, said the Moody's downgrade "is a strong reminder that our nation's fiscal house is not in order."
