Dec 11, 2008

The value of currencies bounce around, certainly, but a couple months ago it took about $1.26 to buy one euro. Last year, when the dollar dropped in value, it took $1.59 to buy a euro. It gained over 30 cents this past year as the European economic crisis took hold.

You see, the first part of the crisis was in America, dropping the dollar. Then that had a ripple effect in Europe, and so the euro dropped and the dollar rose.

Now we are probably seeing the next round begin, where the dollar is again dropping. It is not that the euro is gaining strength, but that the dollar is dropping in value faster than the euro. Yesterday it took $1.30 to buy a euro, and as I write this, it now takes $1.33 and 1/3 cent to buy one euro. This is a rather massive drop in one day.

Some currency traders are going to make a fortune on this. Others will lose that fortune. Actually, fortunes simply change hands.

It will be interesting to watch how long the dollar drops before the secondary effect hits Europe once again and tanks the euro.

These are the things that put pressure on governments to devalue currencies and raise the price of gold (and, really, all other commodities).