Why Are They Buying the Dollar?

Posted by Jeff Carter
on November 16th, 2010

The US dollar continues to get stronger in the face of the Federal Reserve’s attempts at devaluing it.
Why are markets acting this way? Based on the policy, longer term rates should be creeping lower and the dollar ought to be getting weaker.

It’s all about timing. For months, the tea kettle that is European government finance has been threatening to blow. Perhaps we are at that time. The EU is trying to force the Irish to take an aid package. It’s medicine the Irish don’t really want, but can’t afford not to take. Kind of like chemo.

From the Financial Times, “Eurozone finance ministers will press Ireland and Portugal to spell out their detailed plans to handle their debt loads amid signs that the two countries are edging towards an international bail-out.

The meeting of eurozone finance ministers in Brussels on Tuesday comes amid signs of increasing fractures within the monetary union over the European Central Bank’s efforts to pressure Ireland into taking aid.”

The Greeks are worried as well. ”Greece has promised to stick to its deficit reduction plan, while its prime minister said Germany’s tough stance could push debt-laden European nations such as Portugal and Ireland to bankruptcy.” It doesn’t end there. Don’t forget about the Spanish. Or the Italians. Or the French. The ne’er do wells will try to lay this at the feet of the Germans. But the Germans didn’t tell them to set their retirement age at 50, or set entitlements at the level they did.

Irish fiscal debt will be 30% of GDP. But Irish public debt will be 100% of GDP. The rest of the PIIGS aren’t any better.

The end game for Europe is now. Once it’s complete, the dollar will resume its slide. Then the focus will shift to the US. The federal government will have to adopt some austerity measures of it’s own. But more importantly, it’s going to be the individual states. California and Illinois are two to watch. I don’t think people in Kansas are going to be any more ecstatic about bailing out free spending Californians or Illinoians than Germans are about bailing out the Greeks. That’s the great thing about economics. It’s math, but it’s really about human nature.

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