Thursday, March 24, 2011

Portugal Government Collapses and the Euro… Goes Up

Overnight, the Portuguese government collapsed following a vote in parliament against a new austerity package aiming to reduce the country’s deficit. Prime Minister Jose Socrates resigned after the vote, as he vowed he would do if this deficit reduction was not approved. He claimed that raising taxes and implementing severe cuts in spending would lead to substantial debt reduction and allow the country to avoid a European bailout. So in essence, the “no” vote has now guaranteed a bailout will come from the European Union summit taking place today and tomorrow at which leaders are discussing the euro-zone debt crisis. The market has a lot of faith in those leaders to quell debt fears as the Euro, currently trading at $1.42, gained against the dollar today.

Traders were quoted as saying the Portugal bailout had been priced into the market already, and all the selling necessary has occurred. Looking at the chart below there doesn’t seem to be much selling in the last few months as the Euro is flirting with 12 month highs. I will be interested in watching this level to see if the Euro breaks to new highs or finds resistance here.

If you ask me, this seems to be more of a statement regarding the dollar than the Euro. The European Central Bank has expressed interest in raising interest rates to counter inflation problems which supports the Euro, and the Federal Reserve is certainly not at that point. If Bernanke’s ultimate goal is to debase the currency then I certainly think he is winning this race. And you know we will continue to hold gold to hedge currency debasement until he releases the throttle.

Chart: Rydex Euro ETF (FXE)