NEW YORK (CNNMoney.com) -- Now that Greece has finally gotten its bailout, are the days of the strengthening dollar over?
The greenback has gained about 8% against the euro so far this year. Many experts said a lot of this rally had to do with the notion that the dollar was now a much safer haven than the euro in light of the debt problems facing Greece, which is one of the nations that uses the euro currency.
So it would be reasonable to think that the euro may finally get back on solid footing. Not so fast.
The dollar gained more ground against the euro Monday morning, the first day after the $146 billion Greek bailout was announced. And the dollar's strong run may not be over yet.
After all, even though it looks like Greece may be able to avoid actually defaulting on its debt, it's not as if the country is now fiscally fit. Plus, the bailout news was not a surprise. There's been speculation about an IMF/EU deal for months.
"The reaction to the Greek bailout for the euro has been less than enthralling. At the end of the day, people knew there would be some financial package," said Nick Bennenbroek, head of currency strategy with Wells Fargo Bank in New York.
There are also four more euro-users that are part of the so-called PIIGS (Portugal, Italy, Ireland and Spain) that face varying financial problems. Standard & Poor's cut the credit ratings of both Spain and Portugal last week.
Michael Woolfolk, senior currency strategist with Bank of New York Mellon in New York, said the continued sell-off in the euro Monday shows that investors think the Greek bailout doesn't completely end Europe's debt woes.
"This is a nice start to the resolution but this is not a garden variety crisis. It will linger for the rest of the year," he said. "We are likely to see further credit downgrades and this also leaves open the question of whether other countries like Spain or Portugal eventually ask for similar bailouts."
So how much further can the euro, which is currently trading near a one-year low of about $1.32, fall? Bennenbroek said the euro will probably slip to about $1.30 within the next three months -- regardless of what happens with Europe's fiscal difficulties.
Bennenbroek added that even if all the PIIGS countries are able to quickly put their debt problems behind them (which doesn't seem likely) the dollar still looks more attractive than the euro simply because the U.S. economy appears to be rebounding more quickly than Europe's.
With that in mind, Bennenbroek said the Federal Reserve will probably move to raise interest rates more quickly than the European Central Bank. An eventual rate hike would be good for the dollar as a country's currency tends to rise when interest rates are going up.
"Even if Greece was not on the headlines, the economic growth and interest rate outlook of the U.S. still favors the dollar over the euro," he said.
Woolfolk agreed that the euro will continue to drop He said the euro could fall as low as $1.28 by the end of this year and $1.10 by the end of 2011. But he also thinks that significant moves going forward will be tied more to when Fed chairman Ben Bernanke decides to raise rates.
"It all depends on timing of the Fed," he said.
Still, it's worth remembering that the dollar and euro don't tell the whole picture. They are only two global currencies, albeit two very important ones. The greenback, however , is not doing as well against many other currencies as it is against the euro.
Anthony Welch, co-manager of The Currency Strategies Fund, a mutual fund specializing in foreign exchange investments based in Sarasota, Fla., noted that the currencies of Brazil, Canada and New Zealand have all gained against the dollar as of late.
The one factor those three nations have in common is that they are rich in commodities. As such, their economies might grow more quickly than the U.S. over the next year as they benefit from demand for oil and other commodities.
That's important because it confirms that a healthy shift has taken place in the currency markets. All currencies appear to be trading based on the fundamental strength or weakness of their respective economies. It's no longer the case of the dollar rallying because it's "less worse" or because of a global panic.
Welch said he thinks the euro could fall to about $1.25 against the dollar before long but that the dollar may continue to weaken against the currencies of countries with a heavy commodity focus.
"We've gone away from the dollar being a fear trade. Back in late 2008, people just sold everything else and piled into the dollar. That's not happening anymore and that's a good thing," he said.
|Overnight Avg Rate||Latest||Change||Last Week|
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