Compared To What?

The U.S. dollar is the strongest it’s been in a year-and-a-half.  Is this renewed strength a sign of American economic strength?

In a way – but it’s all relative.  The euro broke to a new low recently, and the dollar and the Japanese yen were both stronger, because of a flight to quality.

Japan, which is still recovering from last year’s earthquake and tsunami, has enormous debt, as does the U.S.  So if the dollar and yen are strengthening, it’s a sign that the euro is in deep, deep trouble.

The yield on 10-year U.S. treasury bonds hit a new low recently, at 1.45%, as did the 10-year German bund (1.18%) and the 10-year British gilt (1.53%).

 Is Europe Burning?

Even the ever-bullish MarketWatch was noting a swoon in global markets, due to “fresh concerns that the European currency union is nearer to dissolution.”

As MarketWatch’s David Callaway noted, “Investors are rushing to safe havens in preparation for financial Armageddon, the long-feared run on European bank deposits that is expected to develop once Greeks awake some Monday morning this summer to find out the euros in their bank accounts have turned into devalued drachmas.”

 The Pain in Spain

In addition to growing conjecture that Greece is going to exit the euro, there is growing conjecture that Spain’s banks will need to be bailed out.

Recently, the S&P 500 broke below 1300.  Not coincidentally, at pretty much the same time, the yield on Spanish bonds went much higher.  Shortly afterward, the International Monetary Fund made a statement that it is considering bailing out Spain.  Shortly thereafter, the IMF made a statement denying any potential bailout.

So what’s really happening in Spain?  The answer is anyone’s guess, but if you’re considering investing your life savings in Spanish bonds, you may want to reconsider.

At least the price of oil is dropping.