Dollar Index Snaps Trend, Bounces Back

On Tuesday, the US dollar index

that had been ongoing for nearly a week, bouncing back slightly and rallying nearly 0.40% in early morning trading. The US dollar index moved back above the key $80 level. US equity futures traded inversely, moving lower before the market opened. The situation in Europe may have been the primary driver behind the index's reversal, as Greece debt talks remain ongoing. Private creditors are continuing negotiations with Greece over the interest rate that the proposed, new Greek bonds would carry. The bonds would have a 50% lower face value, but the interest rate is still up in the air with private creditors pushing for a rate above 4%. European Union finance ministers have rejected such a rate. Both sides have some leverage over the other. In theory, EU officials could effectively force the private creditors to agree to their demands, instituting collective action clauses and similar measures to prevent the default from being ruled involuntary. Yet, such an outcome may destroy the credibility of other European bonds and insurance purchased against them. If private holders believe they will be forced to accept unfair deals whenever it suits government officials, there could be a run on other troubled paper in the Eurozone, which could make the general situation even more precarious. Thus, EU officials have a vested interest in appeasing the private creditors. At the same time, they must prevent CDS contracts from being triggered on Greek paper. As CDS contracts are unregulated, it is unknown as to what extent they are held and by whom. The payout of these contracts could put a tremendous amount of stress on European financial institutions—which already seen large sell offs in recent months. John Chambers of Standard & Poor's stated that Greece would likely be downgraded to selective default. Still, a move by S&P would not necessarily trigger CDS contracts, although it could put more pressure on bonds throughout Europe. The Dow Jones dropped nearly 0.50% in pre market, while the S&P 500 moved lower by about 0.60%. The EUR/USD pair dropped below $1.30 again on Tuesday, dropping nearly 0.50% on the session.