The mess with the euro is very similar to the mess with the British pound, U.S. dollar, and the Japanese yen: there simply is too much debt and it cannot all be repaid. The honest way of dealing with this problem would involve some type of austerity measures to ensure balanced budgets and fiscal responsibility on the part of governments as well as partial cancellation of the outstanding debts. Adding more debt to a debt crisis via bailouts, the policy of choice of monetary authorities around the world, only magnifies the problem over the long run.
Since the preferred method of balanced budgets coupled with debt cancellation is not occurring and does not seem to be on the radar, the only other option is to inflate the debt away. Greece cannot do this, however, because its central bank cannot print euros, the currency the debt is denominated in; only the European Central Bank is afforded such privileges. As such, I think the most likely course of events is for Greece to leave the eurozone, to return to its own currency, and to inflate its debt away. I suspect that some of the other members of the eurozone with their own sovereign debt crisis, namely Spain and Portugal, will follow the same route. This article from Edward Harrison offers a more detailed assessment of how Greece would leave the eurozone and use its own currency to deal with its debt solution; I highly recommend reading it.
All of this is set against a backdrop of a global sovereign debt crisis, in which capital around the world is looking for a place to park that is not attached to debt. The primary beneficiary of this is gold (NYSEARCA:PHYS), a trend I consider likely to continue. However, if debt-ridden countries like Greece leave the eurozone, that makes the euro less exposed to debt -- and thus a more appealing currency. And given China's repeated support for the Euro, both in terms of public statements and through the purchase of euro-denominated assets, there are clearly strong hands interested in pushing the market higher.
The conclusions here are fairly straightforward: as signs of Greece leaving the euro grow, and as the euro continues to plunge, the foundation for a powerful reversal is being set. If the euro/U.S. dollar exchange rate can approach the 1.2600 area highlighted in the chart below, and if Greece leaves the eurozone and inspires other debt-riddent member nations to do the same, I think it may constitute a great buying opportunity in the euro (NYSEARCA:FXE). In such a situation, I can see the euro revisiting its past highs beyond 1.6100 and reaching new all-time highs.
Also noteworthy is that the euro is highly correlated to other assets in our global economy -- namely the S&P 500. If the euro can go beyond 1.61, I think the S&P 500 (NYSEARCA:SPY) can also reach new all-time highs, as I recently suggested.
I'd like to conclude with one small comment about sentiment. Regarding the euro, it's not a popular currency; this is not Apple (NASDAQ:AAPL) we're talking about. Buying what people dislike and are afraid of buying, when a rationale value-based analysis tells us otherwise and technical analysis offers us favorable risk/reward opportunities, is perhaps the true holy grail to success in the financial markets.