Moody’s Warns Of US Credit Rating Downgrade Without Budget Deal

"Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government's Aaa rating and negative outlook," the ratings agency said in a statement.

If Congress does not reach a budget deal, more than $600 billion in spending cuts and tax increases will kick in next year, a scenario that's been dubbed the ''fiscal cliff'' as the U.S. economy will sink into a deep recession and unemployment will jump back above 9 percent, according to a recent Congressional Budget Office study.

If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt-to-GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, Moody's said. If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably by a notch to Aa1.

Moody's said it is difficult to predict when Congress will reach a deal, and it will likely keep its current rating and ''negative'' outlook until the outcome of talks is clear. The ratings agency is also watching talks on increasing the nation's debt limit.

The dollar extended losses on Tuesday, the ICE dollar index, a gauge of the greenback's moves against six other major currencies, fell to 80.03, from 80.22 before the report.