What about the Dollar? Debt Default Hangs in the Balance as the US Tries to Garner Confidence

FXOpen

The US government is currently actively engaged in attempting to talk its way out of a potential default on its national debt as the ceiling which is imposed by US law is being reached to the extent that if something is not done, the country's government could run out of money in just two weeks' time.

The myriad of reports which now adorn the internet cover all manner of potential outcomes, including that the calculations have been done and that the US government has enough to cover its debt until and beyond June 1.

This mantra is not necessarily to be taken at face value, however, because debt talks are currently in progress at the White House, meaning that there is a potential need for the government to raise the debt ceiling, something that can be done by the US government periodically if needed.

There is no current consensus on exactly which way the outcome will go; whether the US will actually default on its debt, whether the debt is serviceable and it can carry on as it is, or whether the ceiling will be raised and the country will borrow more money.

However, if a default were to happen, what would happen to the US dollar?

It is, after all, the currency issued by the indebted government, which the Federal Reserve is the central bank for.

Firstly, and perhaps most obviously, the US Dollar could potentially depreciate as investors lose confidence in the country's ability to meet its financial obligations, leading to a possible rise in value by the British pound and the euro against the US dollar.

Yes, the US economy has now got its inflation under control at approximately 6% compared to the European side of the Atlantic's 11% in the West to 25% in some parts of Eastern Europe, but a debt default by a national government is a very serious matter as it is a mark of national insolvency.

The second possible outcome is that forex traders and investors may dump the Dollar and head toward some safe-haven currencies, such as the Swiss franc, in order to trade on a more even keel than a potentially volatile US dollar.

Thirdly, traders of physical commodities that are traditionally regarded as stores of value may ramp up their portfolios. Gold, silver, and consumable commodities such as crude oil may become interesting asset classes as demand for oil is being created via the OPEC countries' current slowdown of production, and precious metals are often used as stores of value at times of national currency volatility.

The fourth area in which the markets may be affected is currency volatility. Major currencies are often subject to minor movements due to their widespread use as de facto settlement currencies and the global dominance of the central banks that issue them as bastions of stability in the financial markets ecosystem.

However, a debt default by the United States would represent the insolvency of the world's benchmark economy; therefore, sharp fluctuations between the US Dollar and its major peers such as the Yen, Euro, Pound, and Swiss Franc may occur.

Lastly, disruption of the global financial markets could be a factor to consider. The wider commodities, equities, stock, and bond markets may be subject to traders and investors dumping toxic US stocks or bonds and realising their value quickly in order to avoid any possible uncertainty of future value in a world in which the United States is insolvent.

Of course, it may come to pass that a default does not happen. It also may come to pass that in order to avoid a default, the US borrows more money.

If that occurs, we all have to ask ourselves if that is really a way out or if it is just a way to become even more burdened and nationally insolvent without actually having it written down by debt insolvency administrators.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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