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May 13, 2011 at 03:24 PM
Currency confusion has reached epic proportions. At the inception of the credit crisis, a pattern emerged in which the dollar would plunge until European sovereign-debt worries triggered a flight to safety and a dollar rally. As Europe and the IMF restored stability, the dollar plunged again and the process repeated.
Erik Swarts captures this patternin his Market Anthropology blog. What’s most striking in the blog is the symmetry of the chart — namely, the inverse relationship the two currencies have exhibited since the late summer of 2007. The euro has the upper hand right now, but Swarts implies that this may not last long.
“Europe holds the majority of debt from the commodity rich emergent markets that were in free fall, due to the collapse in the CRB Index in 2008…,” Swarts explains. “If and when the commodity sector actually breaks down for the cycle, Europe will not only have to deal with their respective sovereign debt issues, but the sleeping minefield of subprimesque loans to those emerging markets so heavily dependent upon bubblicious commodity prices.”
For good measure, he adds,“the ECB still has to deal with the 12 disparate growth and debt tracks” and “a sovereign wealth crisis every other month.”
Should investors prepare for a new flight to safety by scooping up dollar assets?
Not according to Axel Merk, chief investment officer of Merk Investments. “Imagine a country that spends and prints trillions to patch up any problem,” explains Merk, in an article published Thursday in the Financial Times, entitled, as if in answer to Swarts, “Dollar in Graver Danger than the Euro.”
“Now imagine another country where there is no central Treasury, meaning that bail-outs are less easy, and which has a central bank that has mopped up liquidity over the past year, rather than engage in quantitative easing. Why does it surprise anyone that the latter, the eurozone, has a stronger currency than the former, the U.S.?”
Merk suggests that sovereign debt problems relate to crisis in “peripheral” countries and are reflected primarily in bond spreads, not the euro itself.
