Thursday, January 21, 2010
The Dollar's Falling, Isn't It?
FT Chart of the Euro priced in US$
Read any newspaper. Watch any TV currency report, and what will you hear?
The US$ is weak, and falling.
The foreign exchange index for the $ (or any other currency) covers hundreds of other currencies so you need someone with a powerful computer system to tell you what's really going on, if you wish to be sure, as the forex rate against a single currency might be misleading as to the real trend.
But sometimes your own intuition can be just as useful as a 'scientifically' measured figure. The $ might be 'falling', but remember. 60% of its Forex volume is with the Euro, and the Euro, as the above chart shows, has started to fall and continues to fall against the US$. You might say that 60% of the US$ is strengthening, while the other 40% is not moving much as yet. Or you might also say, that means the dollar is now not falling, but rising!
The Greek fiscal crisis is the trigger. The situation in Greece is so bad, it is sending shock waves around the globe. No one knows exactly how bad it is, as the information about borrowing and spending is so poorly maintained. The market has run all year on the belief that if any Euro country were to approach default, it would be bailed out by the other countries. That was fine if the bluff was never called. But now the bluff is being called, and the game of Euro Poker is reaching a new phase.
How can the other countries of the EU bail out Greece? Their own fiscal positions are already approaching critical in many cases, such as Britain's and the PII(G)S. The key is Germany. Will the Germans be willing to do yet more bailing out? I think not. Merkel wants to save Greece, but if she does, there are at least four more countries, whose fiscal accounts could be equally catastrophic as those of Greece. The Germans have, in any case, learned how costly it is to carry the financial problems of others when they merged with East Germany, and Kohl insisted on parity between the Deutsch Mark and the Ost Mark.
Germany's exports are down 20% since the depression started. Her population is both falling (forecast to reach 70 million) and rapidly ageing. Her own fiscal position is already looking difficult in the years ahead.
The hard reality, given German reluctance to save the Euro, is that Greece will be allowed to crash out. Politically that reality is still not being faced up to, but markets move faster. Once one country exits, currency traders will immediately be sniffing out the next candidates for Euro exit. Until the crisis is resolved, the value of the Euro will be hit.
The trend followers, those like Soros' Quantum Fund, will pitch in and short the currency earning billions as the currency falls, until the Greeks are out. The market will drive the political action that is becoming inevitable, just as it did when Britain crashed out of the ERM in 1992.
The only other way this could resolve, is if the Bank Of International Settlements in Switzerland, and the IMF take on Greece's rehabilitation on behalf of the ECB. Will the international bankers decide to carry the risk, with Greece kept inside the Euro, and forced to make dramatic economic changes. That would be the start of one world government for real, and the erosion of the authority of the EU.
It's not their plan. They might have the money available, but the international central bankers are private. They want to hide behind the EU, not replace it. Maybe the problem is just too big to solve, no matter how much money they have to throw at it. EU political will is reaching the end of the line. Their bluff is being called. No one wants to carry the responsibility for others, when all is said and done. That reality is starting to dawn.
This could be a great day for nationalists, and democrats. The reality that bureaucracies cannot run countries is starting to hit home. But it takes a depression to prove it.
UPDATE - Open Europe
EU considers loan to Greece to avoid seeking IMF help for eurozone;
European Voice reports that EU officials are exploring the possibility of providing a heavily-conditioned loan to Greece instead of seeing it turn to the International Monetary Fund in order to avoid the stigma of a eurozone country seeking IMF assistance.
The EU has a European Commission-administered programme for €50 billion of emergency assistance to member states with balance of payments problems, which has been used in the past year to help Hungary, Latvia and Romania. But the programme is designed specifically for non-eurozone countries and has previously been deployed alongside support from the IMF. Bloomberg notes that Greek Finance Minister George Papaconstantinou has denied the reports
This is the best moment for Ireland to quit the Euro. If Ireland were to relaunch the Punt and immediately fix it to the US$ or to Sterling, or a mix of the 2, but keep its debts in Euros, the value of those debts would start to tumble as the Euro tumbles. It would be a self fulfilling act. Worth a thought, lads?