Tue 24th July 2012
By Peter Lavelle
If Greece were to default, the US dollar would likely gain as a result. This is because, in the ensuing uncertainty about Greece, the foreign exchange markets would turn to global safe havens for relief, of which the US is the biggest.
Hence, demand for the US dollar would rise, helping it gain strength against (most certainly) the euro, as well as risk-based currencies such as the Australian dollar. Against the UK pound meanwhile, it’s harder to predict what would happen with the dollar, because sterling is also a safe haven.
Of course, even if Greece does default, there’s no guarantee the US dollar will do this. This is both because it’s impossible to predict which way the exchange rates will go, and also because there are countless factors influencing them.
For instance, what if Greece defaulted, but at the same time the remaining Eurozone nations declared a fiscal union? That would likely strengthen the euro, as the outlook for the continent improved dramatically. In that event, the US dollar could even weaken as a result, as Greece moves into the background.
Furthermore, just because we can speculate that Greece will default, doesn’t make it’s likely to. Greece has so far endured for two years in the euro in spite of its crises, with the nation's leading politicians staking their careers on the currency. Indeed, popular support for the euro remains high too.
Given that, why would Greece give up the ghost now? The amount of political capital behind the euro is huge, as European Central Bank president Mario Draghi has noted. To leave would be the first reversal of European integration since the end of the second world war. Even in these difficult circumstances, it wouldn’t be taken lightly.
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