Thursday, February 25, 2010

Why the Financial Collapse of Greece Is Not Necessarily a Negative for the Euro

The dollar is approaching an eight month high against the euro. Many commentators are attributing this to the Greek crisis. But the dollar is climbing against other currencies, as well. The US dollar index, for example, has been climbing since November.

Euro weakness would have occurred even without the Greek crisis. The Greek crisis is not necessarily damaging to the euro as long as the EU doesn't try to bailout Greece by printing more euros.

The real fuel behind dollar strength is. as I have long forecast, the result of supply/demand factors. Put simply, the Fed is not printing money (M2) to any significant degree, which means the supply of dollars is not growing. Thus, there is no reason for a decline in the dollar.

Further, since the global economy has been structured based on a declining dollar, a global restructuring based on a US no/slow money supply growth is occurring, a kind of covering of dollar shorting, if you will. This is the primary factor behind dollar strength and weakness in the euro.

Given that the dollar would be climbing against the euro, even if there wasn't a Greek crisis, this may present, in the not too distant future, a trading opportunity.

Since many traders believe that it is the Greek crisis that is primarily fueling dollar strength, any short-term lifeline thrown the Greeks is likely to spur a kneejerk short-term rally in the euro. Any such rally should be shorted. A Greek bailout at best would be neutral for the euro, but would be extremely negative if euro money printing is included as part of the bailout.

1 comment:

  1. Nice thinking. It is such a bewildering time, your clear analysis here is welcome, particularly since many of those who would just follow the Greek chorus hold important dollar assets that shouldn't be wasted on entertainment or folly.