The global economy is reaching the same fever pitch of volatility as in 2007 just before the credit crash, and bank liquidity crisis. Only this time, it is the Euro and other global currencies that are falling as the dollar strengthens and passes the 80 point mark on December 13th.
Global events today such as Iran shutting off the Straits of Hormuz, and a rejection of a potential bailout proposal earlier in the day by German Chancellor Angela merkel have sparked a flight to safety and a global demand for dollars which is causing the reserve currency to spike nearly a point in morning trading.
The Euro, after rising 300 bps two weeks ago, has now lost all of their gains and has fallen an additional 100 bps, threatening another liquidity event that was staved by the Fed just three weeks ago.
A stronger dollar is also leading to deflation as the purchasing power of the currency gets better for US consumers. This of course is leading to a fall in commodity and asset prices as gold is down more than $70 from its support just four days ago.
For the US, a stronger dollar will mean trouble for their maturing debt and treasuries, which will cause a spike in interest rates and the cost to borrow money.
Global events are now leading central banks to come to a rubicon, and they will have to decide on a major program like in 2008 to stave off a total collapse in the Euro Zone. Whether this means monetization by Germany, the ECB, or the US Federal Reserve, a strengthening dollar coupled with a falling Euro will have domino affects on the entire banking system if liquidity seizes up once again like it almost did in November.
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