Forex Traders Contend with Greece and End of QE2

By Kathy Lien, Director of Currency Research, GFT,

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Forex and Currencies
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