With the exception of the euro, the U.S. dollar is trading
higher against all of the major currencies. This implies that
investors remain nervous about Greece and the votes in Parliament
this week. According to French Finance Minister Christine Lagarde
and President Sarkozy, the French government has convinced most of
their banks to roll over as much as 70 percent of their Greek debt.
Rating agencies have been very skeptical about whether investors
would agree to voluntarily rollover their debt but it appears that
arm twisting by European governments has helped to smooth that
process. However news that four of Prime Minister Papandreou's
deputies could defect from the Socialist government suggests that
the Austerity Package could still be rejected. In our opinion,
Greece has their back to the wall and as much as their people will
protest the measures, the government has no choice to drag them
forward kicking and screaming if they want to avoid plunging the
economy into deeper recession. Once the austerity measures are
approved, it should bring relief all investors, helping to lift the
euro in the process.
Meanwhile the U.S. dollar was unfazed by slightly weaker than
expected economic data. Personal income grew by 0.4 percent while
personal spending held steady in the month of May. Not only did
both reports miss expectations, but there was also a downward
revision to the prior month's numbers. Even though incomes are
growing at a very moderate rate, spending has ground to a halt. A
slowdown in hiring and high prices made consumers weary of
spending. Unfortunately this is not a healthy trend for the U.S.
economy and gives the Federal Reserve stronger reasons to keep
monetary policy easy. Although many U.S. economic reports are
scheduled for release this week, none of the data are significant
enough to change the Fed's monetary policy plans. Quantitative
Easing is coming to an end this week but the economy is not
performing well enough for the Fed to completely remove stimulus,
which is why they will reinvest principal payments of maturing
securities for as long as they deem necessary. Without a big buyer
like the Fed coming in everyday to buy Treasuries, yields should
begin to trickle higher, which should be positive for the U.S.
dollar. In fact, the end of Quantitative Easing should mean the
beginning of a longer-term dollar rally that could begin as quickly
as this week.
In the meantime, we cannot forget that the U.S. dollar is a safe
haven currency and with such a big event risk happening in the
early part of the week, the desire for safety will determine
whether the dollar rises or falls. If the Austerity Package is
passed by the Greek Parliament, safe haven flows will recede as
investors celebrate by buying high yielding currencies. This would
drive the dollar sharply lower against high beta currencies such as
the euro, British pound and Australian dollar. If the Greek
Parliament rejects the package, investors will become very nervous
and we will most likely see a massive flight to quality into safe
haven currencies such as the U.S. dollar and Swiss Franc.