U.S. Credit Rating at Risk as Trade War, Capital Controls Loom

European credit rating agency Scope has issued a warning that the United States' credit rating could be downgraded if a prolonged trade war erodes global confidence in the dollar or if President Donald Trump implements more extreme measures, such as capital controls.

The consequences of Trump's tariff policies include the most dramatic decline in the dollar against other major currencies in over 50 years. Investors in the credit default swap (CDS) market, used to hedge risks, have priced in the possibility of a U.S. credit rating downgrade up to five times this year.

Based in Berlin, Scope is used by the European Central Bank to assess credit conditions, alongside S&P Global, Moody's, and Fitch. The agency stated that the U.S. is one of the countries most vulnerable to the trade war, especially in more extreme scenarios.

These extreme scenarios include a prolonged tariff dispute and/or the implementation of capital controls by the U.S. — taxing foreign investments — which could lead to the emergence of a viable alternative to the dollar as the global reserve currency.

"If doubts about the dollar's special status increase, this would be extremely detrimental to the U.S.'s creditworthiness," said Alvise Lanza - Yunus, Scope's head of sovereign debt ratings, in a report released on Tuesday.

Scope is the first agency to issue such a stern warning about a potential U.S. credit rating downgrade since Trump began making significant adjustments to the post-World War II global economic order.

Currently, Scope rates the U.S. at AA with a "negative" outlook. This is lower than the AA+ ratings from S&P and Fitch, and also lower than Moody's rating, which is the only major agency still rating the U.S. at the highest level of AAA.

Lanza - Yunus added that if China and the European Union deepen their trade relations, if China further opens its economy, and if the EU can convince its citizens to invest more in the bloc's flagship projects, doubts about the dollar's status will intensify.

"These changes are not likely to happen quickly," Lanza - Yunus said.

Scope also issued broader warnings for other countries with large trade surpluses and/or significant financial exposure to the U.S. These countries include open economies like Ireland that align with global business cycles, countries sensitive to rising financing rates like Italy, oil exporters, and countries with weak currencies like Turkey and Georgia.

The ultimate impact on economic growth, inflation, public debt, external credit indicators, and sovereign credit ratings will depend on the macroeconomic environment, according to Scope's report.