Dollar strengthens, euro, pound weaken as eurozone crisis comes to a boiling point

When George Soros was a little over 50 he took some time off because market tensions made his back so bad it was hard to work. There must be an awful lot of bad backs in financial markets these days at the current levels of tension.

You get to a point when something has to give way. That would appear to be the US dollar at $1.35 to the euro and $1.55 to the pound sterling. Conversely as the dollar rallies then gold and silver are also behaving like a currency and falling against the greenback, albeit not as much as some rival currencies.

Strong dollar?

ArabianMoney has made this observation on a number of prevoius occasions but it is worth repeating as it is important again now. When US financial markets go down that is an automatic trigger for a rally in the dollar.

It’s simple: as people sell their stocks then they get dollars in exchange and those dollars have to come from somewhere and that new demand puts upward pressure on the relative exchange value of the greenback. Well, perhaps it is a bit complicated for some people or too basic, and that is why it gets forgotten.

Ergo when we see sharp upward movements in the dollar and sharp sell-offs in other financial markets this is a linked phenomenon. You can also to some extent see the upward pressure on the dollar as an indication of falling markets to come and extrapolate that trend.

Eurozone boiling point

What is very clear this time is the reason for the move. The eurozone crisis is coming to a boiling point. We are not hearing all the bad news. The banks are about as transparent as a brick wall. Actually that is the problem because they can therefore not trust each other and stop trading among themselves. That is what is happening or not happening and we are being kept in the dark as far as possible.

Politicians are not so clever, they say things like ‘we must be careful not to worry the markets’. What do they think that does for market sentiment, although if they sat reading the real data to the public it would be worse.

For what will happen when Greece defaults? This is not an isolated nation as a few French fantasists would like us to believe. There is an obvious contagion across the more highly indebted nations of Europe and then you have to look at the even higher debt levels in the US and Japan, and conclude that they do not live in splendid isolation either.

However, a flight to the dollar can only be a temporary safe haven for this very reason, and once the euro crisis is done there remain several other crises to come, most notably the crash of the US bond market. You will want to be out of the dollar and into precious metals before that and the ArabianMoney iinvestment newsletter next month will have a few capital ideas on what to do then (subscribe here).