Is the Dollar Too Low or the Euro Too High?

...that is the question being posed by this article written by Ambrose Evans-Pritchard for the UK Telegraph's business blog.

The die is now cast. As the euro brushes $1.50 against the dollar, it is already too late to stop the eurozone hurtling into a full-fledged economic and political crisis. We now have to start asking whether the EU itself will survive in its current form.

It takes eighteen months or so for the full effects of currency changes to feed through, so the damage will snowball late next year and beyond into 2009. Although "damage" is a relative term.

As Airbus chief Thomas Enders warned in a speech to the Hamburg workers last night, Europe's champion plane-maker - the symbol of European unification, in the words or ex-French president Jacques Chirac -- is now facing a "life-threatening" crisis.

Mr Enders said the company's business model is "no longer viable", and "massive losses" are on the horizon. So much for all those currency hedges that analysts like to cite. Have they ever tried to buy a currency hedge? They would discover how expensive these instruments are. Hedges cannot protect a company with $220bn in delivery contracts priced in dollars, when the euro/sterling cost-base is leaping into the stratosphere.

The sudden rocketing in sovereign bond spreads this week between core German Bunds and Club Med debt - Italian, French, Spanish, Portuguese, Greek, as well as Irish, Belgian and Slovenian - is a clear sign that markets are starting to price in a break-up risk for the single currency, however remote. Italian spreads have risen beyond the danger point of 40 basis points. This is less than the 100bp or so seen in Quebec (viz Ontario debt) when it looked as if the separatists might prevail. But it is dangerous nevertheless.

Now I won't pretend, even for a moment, that WMD is the business end of the blogosphere...but it seems to me as if there just might be something to this.

We have been hearing a LOT about how weak the dollar is lately and how that means we're all headed for DOOM, GLOOM, breadlines, and gas rationing...but, I have to point out that a good deal of these folks are liberals. What that means is that they tend to look for the grayest cloud on any given day. There very well may be an alternative explanation that doesn't mean America is sinking into an abyss.

Of course, the thing missing from this analysis is China...