By Paul Quintaro
U.S. equity markets traded lower on Monday morning, as the U.S. dollar index rallied roughly 1%. Commodities across the board showed weakness — gold dropped below $1670. The U.S. dollar index is a measure of the dollar against a basket of other currencies. Perhaps contributing the most to the index's gain was the dollar's move against the euro.
The EUR/USD pair dropped over 1.10% on Monday morning, as investors may have become concerned over the fate of the currency given ongoing stresses in Europe. Speculation is high that one of the major ratings agencies will take action in regards to the sovereign credit ratings of eurozone nations. France's Prime Minister Nicolas Sarkozy may have preempted a downgrade on France, stating on Monday that while a downgrade would be a setback, it would not be "insurmountable."
Monday's action in the EUR/USD pair, while demonstrating the market's disbelief in the euro situation, may actually act as a positive influence. After all, the problem in the eurozone is one of debt: countries have largely spent beyond their means and are now finding it difficult to raise money in the bond market so as to continue their rate of expenditure. If the euro becomes weaker, it makes the debts of these troubled nations less burdensome.
It may also boost exports. Germany's economy is the strongest in the eurozone and is largely dependent upon exports. If the euro weakens, Germany's exports may become more attractive to foreign consumers as the German-made goods appear cheaper.
A weaker euro does not merely help Germany, however. Other troubled eurozone nations — like Italy — also do a fair bit of exporting. Greece, meanwhile, is largely dependent upon tourism, and a weaker currency makes the country more attractive to tourists who get more "bang for their buck." Thus, while many market participants have called for the ECB to print in an effort to stem the crisis, ultimately not printing may be a more effective solution.
Those calling for the ECB to print may be viewing the situation through the wrong perspective: that of the United States. In the U.S., the Federal Reserve's recent policies of quantitative easing have led to weakness in the dollar.
But that relationship may not carry over in Europe. It might seem like a paradox, but printing euros could actually make the crisis worse by strengthening the currency. If the ECB signals that it is willing to print, market participants may have their faith in the continued existence of the euro restored, and that could lead to a rally in the currency — not a sell-off.
Of course, if interest rates continue to rise for indebted eurozone nations, it may not matter. Even with a weaker currency, the PIIGS may find it difficult to continue to finance their governments while having to borrow at such a tremendous interest rate.
Thus, the ECB and eurozone politicians will continue to walk a tightrope going forward. They must keep interest rates down while also depressing the value of the euro. Printing money may not be the solution.
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