The question on every currency trader’s mind is “Will the $trillion bet by the EU to support the Euro pay off?”

With that question in mind, please consider Dollar hits highest in more than a year as euro fears linger.

The U.S. dollar rose to the highest level in more than a year Thursday, gaining on the euro and the British pound, as currency traders’ appetite for risk remained restrained because of rising worries about the long-term implications of euro-zone debt problems even with the European Union and International Monetary Fund’s financial aid.

“It’s a trillion-dollar bet laid by the EU and IMF and looks in danger of failing in the short term,” said Dean Popplewell, chief currency strategist at Oanda. “The bigger issues people are concerned about are the potential social tensions and unrest that these austerity plans by governments will cause. People are divesting out of euros.”

“Nearly one week into the ECB bond purchase program the central bank has not stepped forward with information for market participants on the size, scope or timeline of its quantitative-easing policies,” said Joseph Brusuelas of Brusuelas Analytics. “This is clearly removing what little enthusiasm that remains among global investors for the common currency.”

Complete Roundtrip

The Euro did a complete round trip from 127 to 131 and back on the Euro bailout news. It has fallen once again and is now sitting precariously on support. Here are a few charts to consider.

60 Minute Euro Chart

$XEU – Euro vs. Dollar Monthly

What A Ride

Dollar bears should note the Euro is sitting where it was in 2004. However, the Euro sure got here in an interesting way.

Technically, if the 1.25 area does not hold there is support at 1.20 then 1.15, then a long way down to 1.05.

$XBP – British Pound Monthly

Hell of a ride for the Pound Too

It’s been a hell of a ride for the British Pound as well.

The election of conservative party member David Cameron who will be the next British Prime Minister was supposed to strengthen the pound. So far anyway, it didn’t. Ignoring the 2008 plunge, the Pound is back at levels last seen in 2002.

Dollar and treasury bears need to remember something that I have repeated a dozen times “Currencies don’t float, they all sink at varying rates”.

It will be hard for the dollar to fall vs. most other currencies when the UK, China, and Europe are all in on the printing game.

Moreover, the love affair (and carry trade) in the so-called “hard-asset” countries like Australia, Canada, and New Zealand may come to a screeching halt if oil and commodities plunge when China slows and commodity prices fall once again.

I am bullish on commodities over the long haul, but it is important to pick your spots as 2008 proved in spades.

The overall backdrop still remains deflationary. It certainly is deflation central bankers are fighting, not inflation. That fight has one big beneficiary: Gold.

Gold Monthly Chart

Central bankers have been fighting deflation on and off since 2000. The above chart shows the result. Given the overall global backdrop still remains deflationary, there is every reason to believe that trend continues.

Mike “Mish” Shedlock
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