Standard & Poor's has cut its credit outlook for the US from stable to negative for the first time since 1941, causing the dollar and shares to tumble.
The ratings agency cited the US' soaring budget deficit and its inability to come up with a credible plan to tackle the debt as the primary reason for the downgrade.
Standard & Poor's credit analyst Nikola Swann says: "More than two years after the beginning of the recent crisis US policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures."
S&P's has retained the US' AAA credit rating.
In reaction to the downgrade, the Dow Jones was down 1.49% or 172 points, at 12,169 just after the opening bell.
Traders started selling the dollar aggressively after the outlook was cut. The dollar fell over one cent against sterling, with the pound up to $1.63.
Jeremy Cook, chief economist at World First foreign exchange, says: "If certain fiscal reforms are not in place, there is the prospect of a ratings downgrade.
"The big fear is that if we see a ratings downgrade to AA, a lot of pension funds and investors will have to sell out of US treasuries which will crash the US dollar."
Treasuries also fell, reversing earlier gains and sending yields higher. The benchmark 10-year note yielded as much as 3.45% in New York before trading.
Gold also hit a record high of $1496 per troy ounce.
Reasons to be cheerful
Total investment reaches £9m
Medium to long-term capital growth