The Long U.S. Dollar Trade Appears to Be Overdone

by: The Housing Time Bomb

Currencies have been the talk of the markets this week.

The dollar vs. the euro has been all over the place since Monday. Gold soared as the dollar sold off Tuesday. Yesterday we saw the dollar come screaming back.

I can't help but notice that gold didn't sell off with the dollar rise yesterday. Is this just a fluke or the beginning of a new trend? Time will tell.

When it comes to currencies, the world seems a little undecided following the dollar's huge move.

Recent events in Greece as well as trouble in Portugal and Spain have strengthened the US dollar considerably.

However, as our economy continues to suffer you need to wonder: Are investors buying the US$ because they think it's a strong currency or are they flocking to it because they believe the euro is weakening.

This is a distinct difference in my view because this trend could violently reverse if investors are buying the US$ out of fear versus confidence. I say this because it won't take much for Europe to reverse this trend.

There are signs that Europe may be starting to wise up which could be very bearish for the US$.

I say this because it appears more and more evident that Germany will not bail out Greece. Looking at the most recent poll numbers, it would be political suicide to do so:

A majority of Dutch people want Greece to leave the euro, Dutch daily De Telegraaf reported on Wednesday based on a poll it commissioned.

The poll among 5,300 Dutchmen showed some 92 percent felt Greece should leave the euro currency, while more than 90 percent of the respondents are also in favour of the Netherlands and Germany exiting the euro zone and getting their own currency back, the paper said.

Based on the poll, more than 60 percent of the respondents are worried about developments in Greece, because banks which have bought Greek debt may run into trouble and cause a new crisis, the paper said.

My Take:

I have seen similar poll numbers in Germany. I can't see how they can touch Greece right now with the polls looking like they do. Germany also knows that if a handout is given to Greece, Spain and Portugal will be knocking on their door the next day looking for the same.

The issue Germany has here is they do not have the funds to bail out all three. Portugal and Spain's economies are too large for Germany to bail out. Germany also doesn't have a currency to inflate even if they wanted to do so. As a result, the chances of a Greek bailout are slim.

The dollar has soared as a result because many fear that the euro may collapse or be damaged by the cost of bailing out the PIGS. I think the odds of either of these two events occurring are slim to none.

The aftershocks of bailing out the euro would be felt worldwide, and I don't think world leaders would consider such a move with the economy being as weak and vulnerable as it is. A bailout seems unlikely because they can't inflate the euro which means the money simply isn't there for a bailout.

So what would these events do to the dollar rally?

Many think it will create more instability which will only further strengthen the dollar. I disagree.

Ask yourself this question: If the euro holds together (a risk) and they say no to a Greek/PIGS bailout doesn't this strengthen the fiscal position of the countries that back it?

Could Europe's fiscal responsibility then cause the dollar to plunge?

Let's take it a step further: If Greece or another one of the PIGS then threatens to leave the euro in a hissy fit, won't it only make the currency stronger?

Many are long the dollar right now and it's worked but I am starting to think that this trade may be overdone.

My reasoning for this moving forward is Europe is much more disciplined than the USA when it comes to cleaning up financial messes.

Before I explain why, let me preface this by recognizing that during the good times, the leverage used in Europe was much higher than it was here. Their banks are a mess and in many ways are in much worse shape than our insolvent banks here in the US.

That being said, the million dollar question as we look forward is who will be more disciplined with their regulation when it comes to cleaning up the excesses of the worldwide 30 year credit bubble?

So far I believe Europe has far better policies set in place to begin the cleanup versus the US.

I mean heck...We are still trying to play Ponzi finance over here!

The crooks on Wall St. are still allowed to leverage up and make billions as they continue trading taxpayer dollars. If they lose and go broke after taking on too much risk? No problem! The taxpayer is here to clean the mess up.

Washington refuses to stop Wall St.'s games. This of course will eventually lead to another financial crisis.

Meanwhile over in Europe they have nationalized many of their banks, and they appear to be ready to say no to huge sovereign bailouts. This is a giant step in the right direction in my view.

In England, it's the Queen who tells the banks how they are allowed to spend their money! The banking criminals in The City have been put in their place.

Meanwhile over here in the US it's still the wild wild west on Wall St.

The Bottom Line

The US dollar still reigns supreme as Europe and its currency find their way through their own debt crisis. Greece is Europe's version of our "Subprime Crisis."

However, unlike this country, they seem to be actually trying to contain it by forcing Greece to work through their own problems.

Will Germany stick to their guns and continue to say no to a Greece bailout? Time will tell. If they do, I think there is a good chance Europe climbs out of this mess before the US does unless we decide to stop the madness on Wall St.

Our reputation as the world's "safe haven" will only last so long without real financial reform. All of the talk around reform in this country has been just that: TALK!

If we continue the gunslinger mentality when it comes to our policies on bailouts and financial reform, there is no doubt that our economy will once again crash and our currency could very well go down with it.

Disclosure: No positions in any currencies. Long gold and silver via GLD and SLV.