The United States threatens to default: what will happen to the dollar?

On August

1, a default-threatening limit on public debt began to operate in the United States. How will this affect the US dollar? After a two-year break in the United States, the limit on public debt in the amount of $28.5 trillion came into force again. This deprives the country’s government of the opportunity to borrow and without urgent congressional measures threatens to default by October, Forbes writes with reference to Bloomberg.

The federal debt ceiling was set in June 2019 at $22 trillion. In August 2019, the limitation of debt was suspended for two years as part of the budget agreements in Congress. Now, after a two-year freeze, the limit has been restored to $22 trillion. Taking into account the accumulated debt from August 2019, the amount was adjusted to $28.5 trillion.

The US Treasury on July 30 has already begun to take special measures to maintain cash, suspending the issuance of securities that help local authorities circumvent the debt limit. It is urgently necessary to allow an unlimited increase in public debt, said US Treasury Secretary Yellen. Republicans oppose raising the public debt ceiling, and demand that US President Joe Biden and his fellow Democrats in the government cut budget spending, or take other measures to reduce public debt.

In practice, the decision on the “ceiling” is a major occasion for inter-party bidding on budgetary issues. This time, Republicans and Democrats in Congress have about two months, writes finanz. For markets, the inclusion of the “ceiling” of US public debt means even more dollar liquidity.

When the ceiling is raised, or canceled by a certain the term, as it was in 2019, the US Treasury will have to sharply increase loans in order to compensate for the temporary failure and replenish cache reserves. This, in turn, will lead to a compression of dollar liquidity and may provoke a strengthening of the American currency.