Looming Debt Ceiling Deal to Leave Dollar Locked in Downtrend

As the debt ceiling fight in Washington heads down to the wire with the risk of a technical default looming, investors are growing nervous.

Some are fleeing to physical precious metals as a safe haven from risky financial assets. But on the futures exchanges that determine spot prices, a wave of selling took place this week.

Metals markets have been soft in recent weeks in part because of a rise in the U.S. Dollar Index. It makes little fundamental sense for the currency of a country that is facing insolvency to be going up in value. But when traders seek liquidity, they go into cash. And in the event of a panic out of the U.S. Treasury market, demand for cash would surge – at least temporarily.

On Wednesday, the rating agency Fitch put the U.S. government’s credit on “Rating Watch Negative.” That means it is on the verge of being downgraded.

Of course, U.S. Federal Reserve notes are themselves no safe haven from U.S. debt obligations.