Lagarde Warns Dollar Could Decline if U.S. Debt Deal Not Reached

BY Larisa Epatko  July 28, 2011 at 3:18 PM EDT

The International Monetary Fund’s managing director Christine Lagarde said Thursday in a PBS NewsHour interview that if U.S. lawmakers can’t reach an agreement on the debt ceiling, one of the global impacts could be a loss of confidence in the U.S. dollar.

“There’s quite a lot of concern out there. The global economy is clearly highly dependent on the U.S. economy, because the U.S. economy is the first in the world and it’s a major power in many respects,” she told Margaret Warner. “So to have the lead economy uncertain about its debt ceiling is quite worrisome.”

One of the consequences could be a decline of the dollar as a reserve currency and a dent in people’s confidence in the dollar, said Lagarde. “It would probably entail a decline of the dollar relative to other currencies, and probably doubts in the mind of those people who reserve currencies as to whether the dollar is effectively the ultimate and prime currency of reserve.”

President Obama, the Republican-controlled House and Democratic-controlled Senate are struggling over a deal to raise the nation’s $14.3 trillion borrowing limit and cut the deficit. If they don’t come up with a solution by Tuesday, the United States could default on some of the debt and possibly lose its AAA credit rating, some economic analysts say.

“My dear hope is that political leaders will have the courage and the humility as well to overcome political sensitivity and concerns and doctrines, which are perfectly legitimate, for the sake of the entire country and for the sake of the global economy,” Lagarde said.

Video edited by Justin Scuiletti

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