Dollar Setback

The US dollar is mostly lower today.  The typically short run relationships don't see to be working well at the moment, which in turn keep conviction levels low.  The euro is at the highs for the week and sterling is actually at its best level since May12.  Equities are mostly higher, while commodities are mostly lower.  US-German 2-year spread is flirting with its most dollar friendly level in several weeks.

Many pundits are talking about China's interest in EFSF bonds.  This seems to me to be a post-hoc explanation. Of course China and other reserve managers will buy the AAA euro instrument.  There is simply a shortage of triple A paper.  This allows the diversification of euro reserves as well as diversification of new reserve inflows.  Observers are looking for a reason for the euro's rally and honed in on this. 

However, the fact of the matter is that the euro has been making higher highs each day this week and higher lows.  That sterling is leading the way and is nearing the 20-day moving average near $1.6335 is also constructive as sterling often leads the euro. The next important barrier for sterling comes in near $1.64.  For the euro, the $1.4350 area continues to be the key to a genuine recovery rather than this consolidation.  

The IMF and EU have already indicated, even in the formal process is not complete, to extend the length of its loans to Greece and the EU have cut the rate on its package.  Isn't this a partial restructuring already ? Investors and market participants should be prepared for brinkmanship tactics.  When Greece needs money, European officials press hard and then pullback just before the abyss.  Greece pleads reform fatigue and then makes another concession.  

If history repeats itself--the first time as tragedy the second time as farce, then investors should be prepared for later this year EU officials to go through a similar dance with Ireland.  Currently it is envisioned that Ireland can return to the capital markets in the second half of next year.  Fat chance.    It too, I suspect, will not more aid.  And so it goes.