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The Euro Back Under the Microscope, PIIGS Debt Crisis Round3

Currencies / Euro Nov 14, 2010 - 07:04 AM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleInvestors, politicians and the media have had tunnel vision for the better part of the past five months. And it’s been directed squarely on the United States.

The world has been transfixed on the dollar. Experts have tirelessly surmised how the Fed’s recent decision to launch another round of quantitative easing was reckless. And they’ve claimed this action will do irreparable damage to the buck — the world’s primary reserve currency.


That script reads a lot like one we’ve seen before …

In mid-2009, the global markets became very U.S. absorbed. The anti-dollar crowd was out in droves. And they were insistent that this was the end for the dollar.

When they were asked for proof, they quickly pointed to the list of threatening emergency policies U.S. officials had rolled out, the rising American debt-load and the numerous attention grabbing headlines from leaders around the world …

Back in 2009, even the UN wanted to replace the dollar as the world's reserve currency.
Back in 2009, even the UN wanted to replace the dollar as the world’s reserve currency.

China called for a new world reserve currency. Russia piled on, calling for a new “supranational” currency and recommending the BRIC countries begin trading in local currencies, abandoning dollar-based trading.

But back then, here in Money and Markets, I warned you not to take the bait. I laid out the facts about:

  • The bigger problems residing in other spots of the world …
  • The vulnerabilities in Europe’s banking system …
  • The threat that China’s currency manipulation represented to the global economy … and
  • The role that the U.S. and the dollar played in the world — especially in times of such great crisis.

To be concise, on June 20, 2009, I said … “Beware of the scare headlines — the dollar’s demise is greatly exaggerated.”

And as it turned out, the crowd that was so heavily leaning against the dollar and the outlook for the U.S. economy was reminded that there’s a world beyond the borders of the United States. And the problems in other countries were just as big, if not bigger.

A crisis in the euro zone ensued, and abruptly, capital from around the world wanted to own dollars again. And the euro started a seven-month, 22 percent collapse against the dollar.

The currency that just months earlier was being hailed as the best candidate to supplant the dollar as a new primary world reserve currency, was in jeopardy of falling apart all together.

Act II for the Dollar Bears

Once again, the politicians are at work, trying to gain some political favor within their own countries and trying to leverage their way into more power on the global level, by taking verbal jabs at the U.S. policies and the dollar.

While they’ve been disparaging the Fed’s QE2 and claiming explicit weak dollar intent from the U.S., the dollar isn’t behaving according to plan for such dollar-destruction pontifications.

In fact, there’s a not-so-subtle turn taking place in the currency markets. And a stronger dollar has been at the center of it!

As I suggested in last week’s column, seven key charts were making a case for a bounce in the dollar and a return of a longer-term dollar bull trend.

And now, there are more reasons why this scenario looks even more likely …

While the attention has been on the U.S. and on another wave of quantitative easing, the threats in Europe have been quietly rising.

Insolvent Irish banks could reignite Europe's sovereign-debt crisis.
Insolvent Irish banks could reignite Europe’s sovereign-debt crisis.

Ireland’s failing banks have become its government’s problem. And the extent of damage on bank balance sheets now makes Ireland the most dangerously diseased country in the euro-zone economy.

Interest rates in Ireland have soared to record levels against German rates. And the price of insurance against an Irish sovereign debt default has spiked to record levels. Like last time, the disease in one spot of the euro zone is quickly affecting market sentiment in the euro zone as a whole.

You can see in the chart below, the sharp spike in the credit default swap market for insurance on euro-zone debt suggesting the set up for round #3 of a euro crisis.

chart Euro Back Under the Microscope

And following suit is the euro — perhaps in the early stages of another plunge. It has fallen nearly 5 percent against the dollar in just seven trading days.

Perhaps again, the world is waking up to the problems outside the U.S.

The financial markets are one environment where those in the minority typically come out on top — and those that follow the herd tend to get slaughtered.

With that in mind, given the mass sentiment that leans against the dollar, there are plenty of good reasons to believe a sharp reversal is in order — if not already underway.

Regards,

Bryan

P.S. This week on Money and Markets TV, three panels of experts broke down what’s already been a momentous month in America … the historic mid-term elections, the Federal Reserve’s decision and the October jobs report have created a new political and economic landscape, and contributed to an atmosphere of optimism on Wall Street.

If you missed Thursday night’s episode or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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Comments

Rick
14 Nov 10, 15:28
Gold & Silver: The Pillars Of Congress Will Smite Thee

Since October of 2008, the U.S. dollar has depreciated 24%against the yen. There will undoubtedly be further downward corrections in the U.S. dollar as this downturn progresses. However, as demonic as the U.S. dollar may appear to some, other currencies will fare far worse.

For the most part, if one hasn't already implemented measures to protect his assets from the inevitable onslaught of currency devaluation and rampant inflation, it generally is too late to do so now.

A case in point was the latest Treasury offering of 5 year TIPS in November. During that auction, the fixed rate of 5 year TIPS was set at a shockingly -0.55%. Although the Treasury will guarantee that the investor will recover the principal (at such time that these securites have matured), this does not bode well for those seeking to protect themselves now.

As per amassing gold and silver, it's much too late to hop on that bandwagon. However, all is not lost for those who missed that ride as it will soon prove to be a blessing in disguise. As with any bubble predicated on weak solutions, the gold and silver bubble will soon burst.

Regrettably, most holders of gold and silver will find themselves looking down a two edged sword. If the House of Rothschild does not come tumbling down on them first, then either the President will confiscate those metals outright, or the pillars of Congress will smite them with an excrutiating imposing federal tax.


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