06/11/09 Baltimore, Maryland Despite all the U.S.’ woes, the dollar is holding pretty steady. The dollar index is just a hair lower than yesterday, now at 79.8. Thus, the dollar’s major competitors are just a few cents off recent 2009 highs… euro: $1.40, pound: $1.64, yen: 97.
Interestingly, the pound is currently at a 2009 high versus the euro, at 85 pence. Trader fears are mysteriously shifting out of the U.K. and into Europe, where the “one currency fits all” model is again in question.
“It only makes sense,” writes our currency trader Bill Jenkins, “that given the present situation, a country like Ireland should not be able to borrow at the same rate as a country like Germany. Yet that has been the very working policy of the ECB. One size fits all. Everybody borrows at the same rate, so theoretically, as they put that money to work, they all profit at the same rate. It supposedly provides some synchronicity to the economies. The only problem is, it doesn’t.
“Germany is putting the squeeze on other members. The more trouble the PIGS (Portugal, Ireland, Greece and Spain) are in financially, the worse they feel the squeeze of Germany’s unrelenting and strong fiscal discipline. And it provides yet another reason for Germany to exit the Union. Simply staying on just to feed the PIGS isn’t going to do it.
“At the same time, the incentive for the PIGS to join the Union in the first place was to piggyback on the strength of the Germans — it offered them lower rates at which to borrow. Now they are seeing rising rates, as they are forced to borrow outside the ECB. Rising rates with a stable currency they cannot control forces them to lower wages on their citizens as the only outlet for financial pressures. No politician wants falling wages on his term record!
“In short, I don’t think the euro has any lasting strength in the years ahead.”
Ian Mathias
Ian Mathias is the managing editor of Agora Financial’s Income Franchise, where he writes and researches about retirement, dividend and fixed income investing. Much of his work is featured in The Daily Reckoning and Lifetime Income Report – Agora Financial’s flagship income investing advisory.
Previously, Ian managed The 5 Min. Forecast, a fun, fast-paced daily look into the future of global markets and macroeconomics. He’s also worked in public relations, where media outlets like Forbes, AP, Yahoo! and MSN Money have syndicated his writing. If he’s not at work, you’ll probably find Ian on a bicycle, racing up and down the “mountains” of Baltimore County. Ian has a BA from Loyola University in Maryland.
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and looking at how gold has not recovered from its slap down last week and that the dollar has failed to fall through 78 i think that maybe the fed is in the midst of a modest policy adjustment….indeed it announced a reduction in bond buying sessions from 5 to 4 over two weeks – does that involve dollar quantity changes?…and ben did say that he would not monetize the debt however much credibility that claim has – could have been for chinese consumption especially since he has monetized so much to date….
also the 30 yr t-bond sales today did not price in large inflation – (i am fundamentally an inflationist until i see contrary evidence from the fed)….
all of these small events suggest that the dollar will rally against the euro and yen…..it won’t be a strong rally until stronger policy changes are evinced…and europe has more problems than we have if you can believe that…
thus there are limits to the dollar’s decline at this point…and setup for a modest rally.
To the author: if your economic forecasts are as serious as your naming conventions for countries, then I’m sure the Euro will stay with us for a long time.
Now seriously, please refrain from grouping together a bunch of very different countries, and most important don’t call them “pigs”.
Regards from an angry Spaniard.
Brevity may be the essence of wit. It may also be an indication of facile thinking. In any event, good luck with all that.
I’m headed out for some barbeque pig meat.
And I agree with A. Magan, FWIW.
Wow Ian, great article…
for a moment I didn’t know if it was yours or Bill’s article, or if I was reading The Daily Reckoning or The Onion News….
The use of the term PIGS to name a group of countries is simply insulting. Besides, the author is uterly ignorant of the evolution of the euro economies in the last ten years. While Spain was having a budget surplus Germany was in the red. Now with the recession Germany’s economy is falling by 6% while Spain is declinint by 3%. So, tell me what is so marvellous about the Germans?.
The price level there in the PIIGS is too high and wages most go down on the international level, while the budget cuts needed for these countries to remain solvent during a deflationary depression enforced on them by Germany via the Euro are so staggering that no modern democracy will be able to handle. As the riots in Greece have shown, any government in the world that will try to make public spending cuts in double digit percentage points will not survive. Not to talk about the fact that will need to lower the minimum wage during a depression, an action never done by any government.
Euro Crisis