I think it has to do with a reduced credit rating if they don't raise the limit (because they could then default on existing loans) which makes the interest on the debt higher, which makes US currency worth less?
As I understand it, the US dollar's status as the human race's reserve currency is based on the fact that the US is perceived as always paying it's debts. If they default, countries and banks around the world will suddenly change their reserves into euros, plunging the value of the dollar.
It's not quite that simple. If you're holding dollar denominated assets and you want to 'suddenly' switch to Euros you'd better be happy to sell/exchange those assets for pennies on the dollar. Flight from an asset causes prices to crater. Sudden flight and causes crises and panic.
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It has very little to do with monetary policy. Instead it's the threat of Congress not raising the debt ceiling.
Can you explain how Congress refusing to raise the debt ceiling contributes to devaluation of the dollar?
(Serious question, no snark intended at all.)
I think it has to do with a reduced credit rating if they don't raise the limit (because they could then default on existing loans) which makes the interest on the debt higher, which makes US currency worth less?
As I understand it, the US dollar's status as the human race's reserve currency is based on the fact that the US is perceived as always paying it's debts. If they default, countries and banks around the world will suddenly change their reserves into euros, plunging the value of the dollar.
Take all that with a handful of salt though.
It's not quite that simple. If you're holding dollar denominated assets and you want to 'suddenly' switch to Euros you'd better be happy to sell/exchange those assets for pennies on the dollar. Flight from an asset causes prices to crater. Sudden flight and causes crises and panic.
They may not necessarily change into Euros either, considering many of the European nations adopting the Euro are experiencing debt crises themselves.
This is why investors are flocking to precious metals like gold and silver and commodities, driving the values of these asset classes up.
It's not a serious threat and I think most people know that.
There are enough crazies in the House to make it a remote possibility. That's enough to freak the market.