EU-US Trade War Threatens U.S. Credit Rating, Dollar Status

The partnership between the European Union and the United States has been strained due to a trade war, disagreements over the Russian-Ukrainian military conflict, and differing approaches to cryptocurrencies. The trade war, initiated by Donald Trump's announcement of reciprocal tariffs on Apr. 2, 2025, has led to market chaos and uncertainty, further alienating the U.S. and the EU.

One significant indicator of the cooling relationship is the downgrade warning issued by a European credit rating agency on Apr. 15, 2025. The agency warned that the U.S. credit rating could be downgraded if the trade war continues. The current rating of the U.S. is AA with a negative outlook, while other agencies rate it higher. The European Central Bank uses these ratings to evaluate the creditworthiness of countries, and the trade war is seen as severely damaging to the U.S. and its trading partners.

The agency outlined three scenarios: a tariff-light situation where tariffs are a cause for negotiation, a full-blown trade war with high and constant tariffs, and an economic and financial crisis triggered by escalating tensions. The unpredictable nature of Trump's policies makes it difficult to predict the outcome, but it is clear that countries with strong trade links to the U.S. are at greater risk. European countries such as Turkey, Georgia, Italy, and Ireland are among those most affected.

Measures such as unconditional tariffs and taxes on foreign investment could lead to the U.S. dollar losing its status as a leading currency for international transactions. The head of sovereign ratings at the agency assumes that the EU may get closer to China as a result of the decline in U.S. creditworthiness. The trade war has already affected the U.S. dollar, with a significant decline in its position against other major currencies in April.

The potential implications of a downgrade could worsen the conditions for the U.S. economic development, making it harder to pay off national debt and increasing the cost of borrowing. However, the overall credit rating of the U.S. remains higher than that of most other countries.

Another concern is the threat of USD-pegged stablecoins to the Euro. Italian economy minister urged EU officials to speed up the work on the digital Euro and improve its status as an international reference currency. The concern is that Europeans are leaning toward dollar-denominated stablecoins, which are convenient for cross-border payments, while Europe has no comparable alternative. The MiCA act regulating stablecoins in the EU has already posed challenges for the biggest stablecoin issuer, as it does not meet the new regulatory requirements.