It must be a bit of a surprise that all the bad news out of Europe has seen the EUR-USD rise, lifiting commodities and stocks in the process. Conventional wisdom would have held that mass ratings downgrades, particularly of France and Austria from AAA, would have led to more EUR weakness. Perhaps the answer lies in the U.S. government about to again breach the debt ceiling. If there were ever a reason to feel bearish on the USD, its the inexorable rise in U.S. overall debt.
Today, Treasury Secretary Geithner announced the now familiar gyrations the U.S. Treasury must employ to avoid breaching the debt ceiling. This includes the suspension of payments to the Social Security pension fund. According to Geithner, the debt limit will be increased on 1/27/2012, unless blocked. The U.S. debt limit is currently a staggering $15.2 trillion, with an automatic $1.2 trillion scheduled.
The repeat of this summer's debt ceiling circus is certainly a good reason for the EUR-USD to be moving higher. As S&P pointed out when it downgraded the U.S. credit rating from AAA to AA+, political will for a comprehensive debt and budget overhaul to get U.S. Federal debt on sustainable footing is clearly lacking. While House Republicans are gearing up for a symbolic vote to block the debt limit increase, the manner in which the Budget Stability Act was crafted, this vote will be nothing more than political theater.
So while Greece private sector debt holders are about to take a 68% haircut, and expectations of an outright default by Greece on March 20th grows, the EUR is rising against the arguably more dysfunctional USD.
Precious metals have certainly benefitted over the last month, having hit a near-term bottom in December. Both metals are up sharply from their worst levels at the end of 2011, and today saw both rise solidly on the back of the weaker USD.
As was pointed out the last time the debt ceiling became a critical issue, get ready for the political circus out of D.C. as the January 27th debt limit increase draws nearer.