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6/21/2011

An interesting perspective on the EURO vs the US$...perhaps a stalemate is best for all?

Market volatility has surged over the past weeks as issues such as a potential Greek default and an end to US QE2 stimulus have perplexed traders and investors of all walks.  US stocks have suffered a sizable correction, Treasury prices are caught between a rally in response to an economic slowdown and sell-off because of huge supply, while the two major global currencies (EURO/USD) are simply jerking back and forth. A major issue which has plagued the investment markets over the past year or so, which is gaining intense focus now, involves that latter market, (EURO/USD) exchange rate.

With continued problems with the US real estate market, high unemployment rate and massive creation of $s, some global investors are looking for an alternative as a reserve currency.  In more normal circumstances the alternative would be the EURO.  However, ongoing solvency issues with Greece and the potential for contagion to Portugal, Ireland and Spain have kept investors scratching their heads.

With the dual negatives for the US and EUROZone, the EURO/USD exchange rate has been stuck in about a 10 big figure range.  Could this is actually be good for the global  market?   The answer may be yes for the short term.   Consider the scenario if the EUROZone establishes a tangible fix to the Greek situation.  Such an event that results in confidence in the EURO could actually result in a sustained decline in the value of the US$ and result in significant and chaotic market volatility.

So what is transpiring is a tale of two negatives which is resulting in a currency stalemate, where safe haven currencies such as the Swiss Franc are prospering.  Unfortunately this stalemate may be OK only in the short term.  At some point, one of the negatives (EURO or US$) may prove to be unsustainable and result in a significant devaluation on one of the big players.