PIMCO turns more cautious on dollar, says could see US rating downgrade this year

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Bond giant PIMCO turns a little more cautious on dollar

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Says U.S. could see a ratings downgrade this year

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Says high U.S. debt levels could cause more problems

(Updates with comments on U.S. rating outlook, Fed rate outlook)

By Yoruk Bahceli

LONDON, April 2 (Reuters) - PIMCO has turned a "little bit more cautious" on the dollar in recent months and was a touch underweight the U.S. currency across portfolios, the bond giant's group chief investment officer Daniel Ivascyn said on Wednesday.

The dollar index has shed nearly 4% so far this year on growing concerns that U.S. tariff uncertainty raises recession risks for the world's biggest economy.

U.S. President Donald Trump was set to impose sweeping new tariffs later in the day, escalating a trade war with global partners, risking cost increases and upending a decades-old trade order.

"We have become a little bit more cautious on the dollar," Ivascyn told Reuters at the sidelines of a conference in London.

"In fact we are, across portfolios, a little underweight the dollar," he said.

The dollar was still likely to go up rather than down in the event of a global growth shock, he added.

"However, if we keep running deficits at the levels we're running, if we continue to have increasing friction with our allies and global trading partners, that dollar exceptionalism will begin to wane over time," he added.

A global trade war is also expected to exacerbate price pressures, complicating the outlook for the U.S. Federal Reserve.

Speaking later at the same conference, Ivascyn said there was a "meaningful non-zero" probability that Fed rates would have to go higher in this economic cycle.

"Any kind of uptick in inflation here today especially particular areas of the consumption basket has to be taken very seriously for implications for market expectations and central bank policy," he said.

Ivascyn said he saw the probability of a hike as "10ish" percent, adding rates staying higher-for-longer was much more likely from here.

DEBT WORRIES

A downgrade to the U.S. credit rating could happen later this year, Ivascyn added.

Fitch cut the U.S. sovereign rating by one notch to AA+ from AAA in 2023, citing fiscal deterioration and the repeated down-the-wire debt ceiling negotiations that have threatened the government's ability to pay its bills.

It was the second major rating agency to strip the United States of its top triple-A rating, after Standard & Poor's did so amid the 2011 debt ceiling crisis.

Referring to the market reaction to any further ratings downgrade, Ivascyn said a lot will depend on how investors viewed the outlook for the U.S. deficit.

"These types of debt levels... are going to cause more problems, create more volatility," he added.

"We just think when we look at these debt levels, deficit levels, it does suggest the U.S. has time. But we also don't see yet a willingness to aggressively address deficits."

Ratings agency Moody's said last month that U.S. fiscal strength is set for multi-year decline spurred by widening budget deficits and less affordable debt.

Moody's projects debt to gross domestic product, a key ratio in assessing a country's finances, will rise to around 130% by 2035 from nearly 100% in 2025.

(Reporting by Yoruk Bahceli; writing by Dhara Ranasinghe; editing by Nell Mackenzie and Franklin Paul)