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Could Dollar Rally On EU Woes?


Serbia conflict highlights currency vulnerability.

If you watch CNN on you've probably looked at scenes from Belgrade, where Serb demonstrators have stormed the U.S. Embassy to protest the recognition of an independent Kosovo.

For the last five years I have sporadically written that I feel the European Union is a figment of bureaucrats' imaginations and has about as much chance of a long lifespan as an ice cream in the desert sun. Even many of the usually happy-go-lucky Italians (outside of those in the government) have exactly zero enthusiasm for being wrapped into the EU.

It is also no coincidence to me that should this be the spark for the unraveling of the EU, such a spark would come from Serbia, a region from where many conflicts have exploded throughout the centuries. This is not to pass judgment, it's just that Serbia, Bosnia, Albania, Monte Negro, Croatia, etc. all sit within a small geography and those cultures have survived for thousands of years only through what some would call constant round-robin efforts at mutual annihilation. No EU, U.N., or U.S. can pretend to change that, as sad a statement on human nature as that may be.

How does this tie into the markets? It's about the best if not only reason, in my humble opinion, for a vicious rally by the dollar against the Euro, the most fiat of all fiat currencies since it was invented by politicians in order to justify an economy. Similarly, an unstable Europe (is that redundant?) in the context of the current state of financial affairs around the world would be very likely to accentuate risk aversion to new levels, i.e. a new violent round of unwinding of the carry trades involving the Japanese yen and the Swiss franc.

Net out the dollar from the above equations and all of sudden - as Prof. Cooper would say - it sure looks like the "news is about to break with the pattern," which in this case is the deathly looking chart of the Euro / JPY cross.

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