Moony’s reminds Asia of the dangers of working as Washington’s businessman.
TOKYO — If Pan Gongsheng gets tired of northern bank, the People’s Bank of China government does have a future in wall portfolio management.
Before the April chaos in the US debt markets and the US credit downgrade of last week, Pan’s PBOC and the State Administration of Foreign Exchange ( SAFE ) displayed impeccable market timing, quietly lowering Beijing’s leverage to the dollar in March.
Beijing is now the only No 3 owner of US Treasuries, leaving the UK with the questionable Little 2 spot.
As late as 2019, China was the major financier of Washington’s governmental imbalances. Japan is then responsible for the most, or US$ 1.1 trillion. The issue with China is, of course, that it still has contact to a dollar that is as susceptible to decline as it has in years.
US Treasury Secretary Scott Bessent’s impulse to reject Washington losing its final AAA rating and drive away with the very policies behind the move properly invite more downgrades— and yet greater trouble for the dollar.
US President Donald Trump, Bessent’s director, is not to blame for Moody’s Investors Service’s removal of the picturesque standing it second gave the US in 1919. A national debt that is close to$ 37 trillion can be generated by more than one president.
But the neglect and develop impairment toward simple economic reality leaves much question why Moody’s acted then, on Trump 2.0’s watch.
Bessent’s” we wouldn’t have done anything differently” attitude in Sunday talk show images explains why.  ,
Many of the huge tariffs that cratered the property market, reanimated the “bond police”, and sent the money quickly lower are still with us. Trump’s reduction of China taxes from 145 % to 30 % will cause traders to rejoice. However, it is still at levels that were before the Smoot-Hawley Price Act, which exacerbated the Great Depression.
Markets can think Trump learned his lesson from acting but erratically— and losing nearly all of America’s best allies in only four months— or admit the obvious. The answer is unquestionably false, in the opinion of many investors.
Investors are free to speculate as to whether Trump intends to sack Jerome Powell as head of the Federal Reserve. Or to push for a weaker dollar, either unilaterally or via some” Mar-a-Lago accord” that sends the yuan shapely higher. Many investors worry he will, too.
Folks can anticipate that Xi and Trump will arrange for Group of Two “grand bargain” discussions. Yet Chinese leader Xi Jinping isn’t the caving type. Has Beijing so far offered Trump the slightest retort regarding access to China Inc.? Many economists worry that the Trumpian fireworks will return.
Finally, it’s unclear whether Moody’s got Trump World’s attention in the right way. Any other US administration would understand why Moody’s reduced Washington to Aa1 in a manner similar to S&, P Global, and Fitch Ratings’ in the past.
Not in Bessent’s opinion. ” I don’t put much credence in the Moody’s” downgrade,  , Bessent , told CNN. He emphasized that the tax-cut bill is still being debated in Congress. And that it would encourage economic growth that generates more than enough money to pay down US debt.
It’s an unwelcome reminder — and poorly timed one — that Trump’s 1985 mindset is colliding with the global realities of 2025. Its credit rating hangs in the balance as Washington gives” trickle-down economics” another try.
Also important is the dollar’s confidence. Bessent calling credit ratings a “lagging indicator” isn’t the witty argument he thinks. Not at all when the Republican Party is pushing a “big, beautiful bill” budget that will add trillions to the federal deficit. Estimates add US$ 4 trillion to the federal primary deficit, excluding interest payments, which will surely skyrocket over the next ten years.
For now, some market participants are siding with Bessent.
According to Michael Kramer, the founder of Mott Capital,” the majority are dismissing the news as not a big deal, and perhaps it is not.” ” The US has already had two prior downgrades,” he continued.
Yet there’s no arguing that the timing of all this could hardly be worse. The key point, according to Kramer, is that this downgrade occurs at a time when term premiums were already rising, potentially putting even more upward pressure on.
As a result, it’s still to be seen whether the market reacts differently given the “haven nature of Treasury and the US dollar may be a little uncertain” right now, according to Tracy Chen, a portfolio manager at Brandywine Global Investment Management.
But the dollar’s troubles go much deeper than that. Global markets are buzzing about viable dollar alternatives as a result of the recent euro rally.
Christine Lagarde, president of the European Central Bank, claimed that the recent rise in the euro against the dollar was a result of US President Donald Trump’s erratic policies and that there was a chance for Europe.  ,
The fact that the euro appreciated against the dollar during a time of uncertainty, Lagarde told La Tribune Dimanche newspaper, is impressive. It’s” counterintuitive, but justified by the uncertainty and loss of confidence in US policies in some financial markets.”
One big worry is that US inflation remains stubbornly high as gross domestic product shrinks. As Trump’s tariffs hit US households, inflation risks may be riding in real time.
Given the addition of tariffs to the trajectory of ever larger budget deficits, a higher inflation outcome seems assured, according to Steve Blitz, managing director at TS Lombard. ” Monetary policy alone cannot reverse the trend without the deficit shrinking” . ,
The uncertainty about what might occur following these temporary trade deals, according to Jeffrey Roach, chief economist for LPL Financial, makes things difficult for the Fed because stagflation continues to be a risk. The Fed might not be able to adjust policy in June if the fog does not clear.
In other words, Trump’s climbdown on tariffs might’ve been too little, too late.
More time is needed to examine how the current tariffs shape and impact inflation and the economy, according to Skyler Weinand, chief investment officer at Regan Capital. The Fed is likely to keep rates unchanged for the next six months unless we start to see a significant rise in unemployment.
Analysts at , JPMorgan Chase &, Co , point to a Moody’s report from 2023, when the ratings company shifted its US outlook to negative.
Moody’s reported on Friday that US governments have consistently “failed to agree on measures to reverse the trend of large annual fiscal deficits and rising interest costs.” It issued a warning that this moment would probably come in 2023.
But it’s an open question whether Moody’s is about to revive another 2023 opinion that got lots of attention. Moody’s claimed at the time that the dollar’s position at the heart of the global trading system was secure.
We anticipate a more multipolar currency system to emerge over the next few decades, but the greenback will be in the lead because its rivals will struggle to fully replicate its scale, safety, and convertibility, as Moody’s wrote in May 2023.
Yet, it warned then that increased US protectionism, weaker government institutions and concerns about a default would imperil the dollar’s global dominance.
The risk of confidence-sapping policy errors by the US authorities themselves, such as a US default on its debt, is the greatest near-term danger to the dollar’s position, according to Moody’s warning two years ago. ” Weakening institutions and a political pivot to protectionism threaten the dollar’s global role”.
Trump’s inner circle has occasionally veered off into the realm of capped defaults to gain control over trading partners, which is not all that helpful.
The collision course between Trump and Powell is another significant risk. In a social media rant over the weekend, Trump wrote:” THE CONSENSUS OF ALMOST EVERYBODY IS THAT,’ THE FED SHOULD CUT RATES SOONER, RATHER THAN LATER.'” Who knows, Too Late Powell, a man renowned for being Too Late, will probably blow it up once more, he added. “”?
TS Lombard’s Blitz says that “one can, in fact, imagine a scenario where the Fed helps the dollar strengthen to keep in check the real interest rates needed to sustain needed inflows and all that, in turn, overwhelms the tariffs as a barrier to keep firms from sourcing foreign capital and labor”.
Trump would be more upset about this, though, increasing the likelihood that he attempts to fire Powell. One of the biggest risks to US Treasuries and the dollar lies here.
This fragility of US Treasuries is imparting a unique leverage point for the Bank of Japan, PBOC and other top Asian monetary authorities. Right now, Asia has the most leverage over Washington with respect to bonds, currencies, and services trade. This last paragraph makes reference to America’s significant financial, technology, and intellectual property reliance on Asian markets.
The mechanics of Trump’s trade war suggest an imperfect understanding of the US economy’s Asia-related vulnerabilities. And poor situational awareness as China and the Global South collaborate to find a dollar substitute.
Bond traders, the kind of people who take matters into their own hands when a government’s policy mix seems out of sync, almost certainly will pounce with growing ferociousness.
That puts an even bigger target on US Treasuries and the dollar as 2025 unfolds. And it might cause Googling searches for hedge fund recruiters when Pan’s term at PBoC ends.
Follow William Pesek on X at @WilliamPesek