US deficit reduction talks holding back the dollar
Is anyone else as mystified as I am by the Euro’s continued relative resilience in the face of pretty horrendous developments? Maybe it’s the European Central Bank’s hawkish stance? Maybe the market is discounting the expulsion of all PIIGS from the Euro? The former is certainly plausible, although surely the rate differential isn’t enough to explain the observed strength, (and not going to get as wide as the market thinks), but the latter is surely a game to be played somewhat nearer that inevitable denouement – maybe a year or two from now? In fact, I think it’s just the continuing deadlock in the Washington deficit reduction talks, and when an agreement is reached, the dollar will soar. Right now, I think the market is pricing in the tiny probability of failure of the talks, multiplied by the terrifying consequence of that outcome – a U.S. default.
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