Gm Xanadu...I have been watching this whole thing very closely since 1999, and 2001, when I first bought Euro, after it had fallen sharply below $1.00. The very issues that you mention are the ones that raised concerns amongst traders and investors at that time, namely: how do you unite 15 nations with different backgrounds, who are at different phases of economic growth and sophistication?
It is a very difficult thing to do in the best of times! What if the countries begin to break apart? Why should investors - let alone central banks - be exposed to the risk of that kind of divorce, and bank their future on an experiment without precident in history. Of course those questions are overlooked now as 7 years have passed, and it appears safe and strong....but is it? Greed or fear of USD decline has overtaken prudence
Even as the Euro approached parity and first hit $1.10- $1.20, the $1.50 level was always held out as a possibility, while a tthe same time was also said to be a level that would cause deep economic pain. While the traders may overshoot - as they often do - I think it near impossible that Europe could sustain a Europe at $1.50, let alone $1.60 or higher. There is a limit to this run
I remember last year, when the Euro was crossing $1.35, the French Finance Minister at the time was near apoplectic. As you may recall, France was dealing with those serious riots in the suburbs of Paris - the ones where the unemployed youth were setting hundreds of cars on fire. Those pressures, I'm sure, were sparked by the pressures of a higher currency and reduced international competitiveness. The prospect of a higher Euro was sending him into almost a public panic
Italy and Portugual? No one mentions them anymore, but the Italians were in desperate shape in 2005.
Belgium is so eager for the European project to succeed, and there is of course pride in the high value of the joint currency even as it has a knock-on effect on the economies. I have read economic blogs out of Italy were talk of seceding from the Europe has been raised. Those stories are largely in Italian, but a few are in English - although of course they are not reported in the mainstream press
But it is my belief that all of this began in 2002, when the impact of certain US policy decisions - which were undertaken in 2001 began to take effect. The US government, for reasons of their own, strongly desired a weak currency and were actively knocking the underpinnings from the dollar, which I thought was a foolish and dangerous move....as once a decline broke certain levels, it might be difficult if not impossible to stop. Perhaps they don't care? It would seem so, as officials who have control over the matter seem rather non-plussed over recent developments, even appear to welcome it. Very risky, imho, and I voted with my feet - along with Warren Buffet and others who chose to diversify at that time.
The other issue, which became clear to me in 2003, and later in November of 2004, was that much of the world strongly disagreed with the policies undertaken by GW Bush. After the commencement of the Iraq war, especially when it continued more than a few months, a vote against the US dollar was seen as a vote against US policy. At first it wasn't said in so many words, although it was hinted at in editorials. However, it was obvious in a accelerating decline which begain at that time. The official reason was given as the increasing costs and debt - which were true. But it could also be argued that the world has chosen to overlook any good news that has come out of the US, while deeply punishing any bad news, or news that might be anticipated. This indicates an emotional bias against the USD in addition to a technical one. I could sense this in so many editorials and little phrases belying attitude which appeared in articles written in Europe, the Gulf, Asia and South America.
Of course at this point, bias or no bias, most with any sense of self protection are diversifying out of the dollar simply based on technicals.
But the extent to which the dollar decline was a sort of international vote against the US president became clear to me in Nov 6, 2004, as I stood in line at the CIBC office in St. John New Brunswick, Canada. World consensus was that Kerry would defeat Bush - and even as the reporter was announcing the polls indicating that outcome(taken in Europe and Canada) the dollar was climbing against the Euro and the CAD.
The minute the election results wree announced, the dollar resumed it's fall.
I know that's not very popular to say here in the US, and supporters of the president get very defensive when you mention it. However, this is not an argument, it is simply a fact, one that has now been covered in articles. Dollar boycott is a reality.
So, with the outcome of a US election a year away, and over a year until a new president is sworn in, how bad can the situation get?
I think quite bad, as the article I posted last night from Bloomberg suggests. Below 73, there are no supports left for the dollar...free fall is actually a possibility.
We hang in the balance, dependent on the decisions soon to be taken in China and the Gulf. If the US dollar goes into freefall, the fallout could deal a major blow to Europe, Canada and Japan. The extent of damage on other economies is yet to be determined
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