I’m sure you’ve read the reports.
They read like a John Grisham thriller…
One of the world’s most powerful statesmen… Accusations of sexual assault in a $3,000 New York hotel room… A last-minute arrest onboard an Air France jet on the tarmac at JFK airport…
But the arrest of IMF chief and French presidential hopeful Dominique Strauss-Kahn isn’t fiction. It’s front-page news. And it’s throwing talks to avert a worsening crisis in the euro into disarray.
The charges against Strauss-Kahn are extremely serious. But he remains an innocent man until proven otherwise. And it is not our intention to speculate on the outcome of the charges against him.
The problem is no matter what happens next, Strauss-Kahn’s arrest has the potential to derail efforts to stabilize the euro zone debt crisis. And this could cause international capital to flee the already weakened euro.
Strauss-Kahn – a member of France’s Socialist party and a former French finance minister – was one of the most prominent architects of the bailouts of Greece, Ireland and Portugal. And he was due to discuss a second Greek bailout package in Berlin before his arrest.
Without him at the helm at the IMF, it could prove harder to push through a second bailout for Greece…and a default could follow. This would be a disaster for the euro.
As you know, I am long-term bearish on the currencies of debtor economies. Because it is an “ugly contest” between the U.S. dollar, the Japan yen and the euro right now.
Simply put, all have major problems. And it is too hard to make a call on which is the least “ugly.”
Up until very recently, the dollar has been winning the contest, thanks to ultra-low interest rates in the U.S. and the Fed’s “quantitative easing” program (aka money printing).
But that has changed recently…
Partly due to renewed worries over Greece’s ability pay off its debt…and partly due to renewed risk aversion among stock and commodities investors…the dollar is enjoying a countertrend rally.
Take a look at the chart above. You can see that the US Dollar Index – which measures the exchange value of the dollar versus six major trading partner currencies – has broken above its 50-day moving average, a commonly watched short-term trend indicator.
This means the dollar is strengthening versus other big currencies over the short term.
But the key here is “short term.” Because the only thing holding up the dollar right now is its reserve status. And one thing we know for certain is that the world is getting sick of relying on the dollar as its reserve currency. So it is only a matter of time before the dollar joins a basket of other currencies as the world’s “reserve.”
The bottom line: The euro is winning the ugly contest right now. But the dollar isn’t much better over the long term.
The best way to look at it is which countries owe money and which countries are owed money.
One the one hand, we have the debtor developed world – the U.S., Europe and Japan. These countries are overly in debt. And they are struggling to grow their way out this situation. On the other hand, you have the emerging world, which is not only booming but also has much lower debt levels in general.
So, if you are looking for a way to diversify outside the dollar, forget about the euro…or the yen.
And remember: If you are “diversifying” out of the dollar by buying into the euro, you’re just backing another contestant in the ongoing ugly contest between the world’s debtor currencies.