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With such a large cloud of political uncertainty hanging over the US, it is no surprise that we have seen a continuing weakness in the dollar. The wrangling between the Republicans and the Democrats has very much taken on the characteristics of a school playground argument. It appears that both parties have lost track of the bigger picture – the global perceived value of US debt – and are risking longer-term security for short-term political gains.
Currency and to a lesser extent equity markets have factored in the US government shutdown, but as yet have not fully taken into account the prospect of the US hitting its debt ceiling. This is by far the bigger concern for the markets, as reaching the ceiling would cause the country to default on its debt (among other issues). We would then see debt-rating agencies either warning of downgrades or actually cutting their ratings. Both of these outcomes would raise the underlying cost of borrowing for the US. And with debts of $16.7 trillion, even increasing rates by a fraction of a percent would represent a large sum.
It is widely expected that the US would not be so foolish as to let this happen, but cutting their noses off to spite their faces is something that politicians have a reputation for.