US dollar's role as the world's reserve currency is under threat. During a press briefing at the White House, Joe Biden urged stop playing Russian roulette with the US economy.
The President clarified that he had referred to a potential default in the US, which could hit the economy and threaten the status of the US dollar as the world's currency. Speaking to the US Congress on October 4, Biden admitted the likelihood of a default in the country. According to him, the resolution of this issue depends on the actions of Republicans in Congress. Joe Biden called the obstacles caused by the Republicans in the Congress "so reckless and dangerous", urging them to "stop playing Russian roulette with the US economy".
He warned that aggravation of the current situation threatened the reserve status of the US dollar as the world's currency. Biden said that failure to raise the debt limit would cause the dollar to fall. This poses more challenges for the greenback, which in addition to the default, is threatened by the negative stock market situation and the Fed's actions in winding down stimulus programmes.
As a reminder, last week the House of Representatives passed a bill to suspend the debt ceiling through December 2022. However, Senate Republicans appear likely to block that bill in the coming days. Earlier representatives of the Republican Party promised to do everything possible to block the initiative. They insist on government spending cuts and other measures to reduce the national debt.
The current debt ceiling prevents the US Treasury from issuing the new bonds needed to finance the government. Notably, in August 2019 it reached $22 trillion. Its further growth was suspended until the end of July this year. By now, lawmakers have not managed to raise the national debt ceiling. As a result, by August, the US debt had reached its limit.
Economic and political problems are negatively affecting USD dynamics. On October 5, the US currency is trying to strengthen after failing the day before. The greenback seeks to regain its defensive asset status. On Tuesday, EUR/USD was trading near 1.1598, trying to catch up.
At the start of the week, the US currency slumped markedly, pulling back from the yearly high reached a week earlier. By now, the dollar is trying to recover its losses, firmly strengthening on the back of investors' risk aversion. The greenback managed to strengthen after two failed sessions as large hedge funds were overtaking asset. The reason for this was fears over further US Treasury bond yields, which increased the attractiveness of the USD for investors. The latest weekly positioning data showed hedge funds have increased their dollar holdings against their rivals to the highest levels in two years, despite rising bullish sentiment against the dollar. At the same time, USD long-term interest rates rose to the highest levels recorded since March 2020.
Investors now await US nonfarm payrolls data due on Friday, which is expected to show an addition of 460,000 jobs in September. This will be a reason for the Fed to continue reducing quantitative easing (QE) programmes until the end of 2021. However, experts believe that the central bank will change its plans due to disappointing labour market data.
Amid relatively positive sentiment in global markets, the US currency gained new momentum, rising to its highest level in 2021. In light of this, the major investment banks have revised their USD forecasts. Citigroup currency strategists expect the dollar to gain in value on the back of China's real estate problems, rising US yields, and a gradual global economic recovery.
