Market Overview

As Greece Burns, Traders Run to the Greenback

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With the Greek situation exacerbating in severity, investors are running for the safe-haven of the U.S. dollar.

The U.S. dollar index rose roughly 0.20% on Thursday, approaching $76.

Nearly all currencies declined against the dollar, as investors fearing a default by Greece may have shifted their assets to the U.S. dollar.

The move may have caught strategists off guard. Bloomberg reports that many economic forecasters are withdrawing their bearish outlook on U.S. treasuries in the face of this massive safe-haven play.

It may be a smart move. Greece has not yet defaulted, or restructured its debts, and it is hard to judge how much of a haircut the market may have already factored in.

There is also the question of credit default swaps, and which banks are holding Greek bonds, and in what amounts.

If Greece defaults, there exists a possibility that it could take the entire global financial system down, in a repeat of 2008.

Back then, investors fled to the dollar, as they appear to be doing now, perhaps in anticipation of a second financial crisis.

The U.S. government has long been seen as the most stable institution on the planet. Is the trust justified?

Poor economic data out on Thursday and CPI data released on Wednesday indicate that the U.S. may be entering a period of stagflation. Further, as of yet, the U.S. government is set to run out of funds in August if congress cannot approve an extension to the debt ceiling.

Fundamentally, it appears as though the U.S. dollar is not the safest of havens, yet the market continues to treat it as such. Should Greece's collapse trigger a major financial crisis, the dollar may rally further.

Action Items

Bullish: Traders who believe that the U.S. dollar will remain the safe-haven amid global turmoil might want to consider the following trades:

  • Buy Power Shares DB US Dollar Bullish Index (NYSE: UUP) in a long play on the dollar. UUP is up on today's session, and may move higher if the dollar continues to rally.
  • Buy iShares Lehman Aggregate Bond (NYSE: AGG) in a long play on U.S. bonds. AGG may rally if investors move into U.S. bonds as the global economy contracts.

Bearish: Traders who believe that economic trends in the U.S. dictate alternative plays may consider taking positions in the following:

  • Currency Shares Swiss Franc Trust (NYSE: FXF) is a long play on the Swiss franc. The Swiss franc, like the dollar, has long been seen as a safe haven play. Traders uncomfortable with the U.S. dollar may want to make a play on the franc.
  • SPDR Gold Trust (NYSE: GLD) is a long play on gold. Gold has traditionally appreciated in price during periods of financial turmoil. Though gold took a hit in 2008, its run-up in the period since that time may indicate that it is poised to rally further.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

 

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