Bernanke Speaks and the Dollar Tumbles

In his testimony in front of the Senate Banking Committee today, Federal Reserve Chairman Ben Bernanke urged lawmakers to refrain from using the federal debt ceiling as a “bargaining chip”, Bloomberg reports.

The debt ceiling—which presently sits at $14.3 trillion—will, according to Treasury Secretary Timothy Geithner, be exceeded on August 2nd. The limit would have been exceeded as early as May 16th if it the treasury had not taken “extraordinary measures.”

Bernanke urged congress to work to raise the debt ceiling before the deadline. A failure to raise the debt ceiling could cause the U.S. government to default—an event which Geithner described as having catastrophic consequences.

In his statements, Bernanke warned that a failure to raise the debt limit would lead to “an increase in interest rates, which would actually worsen our deficit and would hurt all borrowers in the economy.”

The debt ceiling has, in recent months, become a major political issue in Washington. According to the Huffington Post, many freshman Republicans—having been elected with the support of the Tea Party—have spoken out against raising the ceiling.

Raising the debt ceiling may prove to weaken the dollar. The greenback, which had been rallying this morning, tumbled in afternoon trading. Traders looking to play further dollar weakness might consider an ETF such as PowerShares DB US Dollar Bearish Index (NYSE: UDN).

With the warnings of Geithner and Bernanke, it seems unlikely that congress would fail to raise the debt ceiling. However, the agreement to raise the ceiling may contain some interesting compromises.