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What will happen to the dollar if the US defaults on debt?

Investors told to wait and watch the dollar as the US reaches the debt ceiling

Investors should take a wait-and-watch approach towards the dollar as the US government has reached its debt ceiling limit.

The US Treasury Department warned that the world’s largest economy is on track to default on June 1 if Congress doesn’t agree to hike the debt ceiling.

Forex industry executives say that the default of the US could spell disaster for the greenback.

Damian Bunce, chief customer officer at Exness, said the US debt ceiling is a major question mark which will dictate the movement of the dollar. “For the whole of 2021 and most of 2022, the dollar strengthened. We saw the dollar weakening from September onwards and now there is a big question mark ahead due to the debt ceiling, which is under debate right now in the US. If the debt ceiling is not resolved soon, we could see a situation where America defaults on its debt. It would be cataclysmic for the world and for the dollar itself. And the interest rates would shoot up. At this point, I would suggest wait and watch approach,” he said.

Elie Nachawaty, senior business development manager for Mena at Xs.com, said the dollar is currently witnessing strong volatility in particular as traders consider the potential risks that have been building up around the debt ceiling issue and that could threaten the stability of the financial system in case US officials are not able to reach to an agreement in time.

“This factor has pushed US traders toward the dollar, which could benefit over the short term. Over the medium to long term, the dollar may decline as the Federal Reserve is expected to maintain its interest rates at current levels for some time before eventually reducing them. This could help drive up the value of the other major currencies in particular the euro and the pound, which could see a tighter monetary policy,” said Nachawaty on the sidelines of the two-day Forex Traders Summit, which began in Dubai on Wednesday.

Medhat Attia, sales manager, CPT Markets, said over the last year, the Fed has been increasing interest rates to rein in inflation. “Despite an increase in interest rates, people are preferring to invest in gold instead of the dollar,” he said.