Would a Debt Ceiling Debacle Permanently Damage the Dollar?

In times of global uncertainty Forex traders seek safe haven currencies. These have typically been the yen, Swiss franc, euro, British pound and US dollar. The dollar is, of course, the big daddy in Forex trading as it is part of more than 85% of all trades. The euro, yen and British pound follow at 30%, 20% and 10%. Daily FX writes about the possibility of a debt ceiling standoff in congress and wonders if such an event would damage the US dollar and markets.

When the financial system seizes, there are no legitimate equals to the US Dollar and Treasuries. That is, there hasn’t been an equal. That may change moving forward – not owing to other markets rising in prominence but due to the US benchmarks losing their status. There are a few developments that could accomplish the heavy fundamental lifting necessary to lower the status of the Greenback – the premier haven for decades. A localized and systemic US crisis, China overtaking the United States in financial girth and the detrimental side effects of an isolationist shift by the country. Yet, the most tangible high profile change currently at play is the risk of a value downgrade by rating agencies and the global financial system.

That value downgrade would come if the USA defaults on its debt, again. The greenback’s bedrock value rests on the full faith and trust in the US government. And now that government appears unable to govern effectively. Would a debt ceiling debacle permanently damage the dollar? Traders are already standing in line to short the dollar.

When Trump was elected, traders expected the resulting stimulus programs, deregulation and repatriation of corporate cash to drive investment into the USA and drive up the dollar. That is not happening. While the White House is mired in scandals and turmoil of its own making the Trump agenda is coming to naught and the dollar is heading south. Traders are virtually standing line to short the dollar.

Now is one of those times when reality begets perception and perception becomes a worse reality. Increasingly Forex traders see a dysfunctional US congress and presidency. That perception will worsen if congress and Trump are unable to come to an agreement and raise the debt ceiling without engendering a crisis.

For How Long Will the Dollar Be a Safe Haven?

Why is the dollar a safe haven currency? Over the years the US dollar has been stable and reliable. It is also attached to the strongest economy in the world. And when other nations want to retain value they buy dollars as a reserve currency. The two primary reserve currencies in the world are the USD at more than 60% and the euro in the 25% range. If traders and nations lose faith in the strength and staying power of the US dollar they will buy more euros, pounds, francs, yen and even yuan to use as reserve currencies and the dollar will continually fall in value. In short the fallout from a debt ceiling debacle would permanently damage the dollar.