Why is the dollar falling on Greek bailout news? Last I checked, that involves a massive shift of funds over to the country, much of which is coming from the IMF and is therefore a devaluation.
The U.S. dollar, for the meantime, is a static currency, so long as the Fed maintains a zero sum policy game with the bonds in its portfolio, and Congress refrains from borrowing more.
Who believes that bailing out Greece is going to be a strengthening act for the euro? It feels more like a move that will weaken the currency, despite Greek austerity.
My guess is the dollar is weakening more out of habit and reflex to the bailout, than for any good reason.
But again, the real issues everyone should be focusing on are the U.S. debt talks, and the state of affairs in China. Get your heads out of the Mediterannean.
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The need for Euro based funds and banks to hedge their Euro exposure has diminished at least for the short term so the pressure is off the dollar (short Euro/long dollar). Further, the impact on global growth of a Greek default has been moved out in time so the risk trade benefits – again, dollar negative. The funds that the Euro zone will provide Greece are denominated in Euros so there is no devaluation of anything other than credibility. The IMF funds, which are not all that great, are a transfer of funds. If they are currently in Euros then again, no devaluation. If in dollars and they convert to Euros then that conversion is dollar negative. Kicking the Greek can down the road makes Europe temporarily safe to invest in so again, an inflow of currency to the region is Euro positive/dollar negative. Now the market can focus on our lack of a debt ceiling/deficit reduction plan.
I generally agree with your point on the euro hedging coming off.
But I don’t think I’d call the IMF bailout a transfer of funds. How much of those funds came from the EU, and how much from the EU was being held in reserve?
Still, very relevant points if you’re right.
My understanding: The IMF is not printing the money for the bailout (they can’t) and, as far as I have been able to determine, neither is the ECB (who could). The IMF portion of the money comes from IMF capital provided by the member countries (including the US and the Euro zone) so it is a transfer. The Euro zone portion is, I understand, from a bailout facility that they created which essentially is the Euro zone governments, who don’t own printing presses, guaranteeing loans. I believe what they did was issue “bailout bonds”, denominated in Euros that were bought by investors and the funds from those are then used for the bailouts. Those bonds are backed by the taxpayers. There may have been outright transfer of capital from governments to the fund as well – I don’t know. But the net effect is Euro neutral unless the ECB buys the bonds and prints Euros to do so. As of a few months ago, the ECB was sterilizing their interventions in this crisis by withdrawing liquidity from the system elsewhere (which seems growth negative but that’s them). I am not sure if that is still what is happening. The best sources for info on the crisis that I know of is the Financial Times (FT.com)