Congress has been given ample time to increase the government’s debt limit, but a lethargic response has forced Moody’s Investors Service to consider downgrading the government’s credit rating, putting pressure on U.S. Treasuries and dollar related exchange traded funds (ETFs).

The Moody’s ratings firm is cogitating on lowering the government’s credit rating from Aaa if no changes on the debt limit or no “credible agreement” on deficit cuts are met, report Michael P. Regan and Elizabeth Stanton for Bloomberg. On May 31, a bill that would raise the debt limit by $2.4 trillion failed to achieve the necessary votes. The S&P has already warned the government that it may lose its AAA credit rating if an agreement on reducing budget deficits and national debt is not passed.

“The worst case could still be bad,” commented Brett Rose, interest-rate strategist at Citigroup Global Markets. “You could still see a 50 basis point move in rates because of a technical default, but many would see that as a buying opportunity.”

Treasury Secretary Timothy Geithner has cautioned that the debt ceiling must be raised by August 2 or the the Fed will be forced to bump borrowing costs at the cost of economic growth. [ETFs Close Mixed in Response to Greece Deal, U.S. Debt Warning.]

For more information on the greenback, visit our U.S. dollar category.

  • PowerShares DB US Dollar Bullish (NYSEArca: UUP) is down 2.1% in the past week.
  • iShares Barclays 7-10 Year Treasury Bond Fund (NYSEArca: IEF) is up 0.7% in the past week.
  • iShares Barclays 20 Year Treasury Bond Fund (NYSEArca: TLT) is up 0.1% in the past week.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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