Wall Street view: The US dollar is heading higher (regardless of any Greek deal)

Greece is hardly fixed... but then again it hardly matters to the US Fed.

Summary: For those who are looking beyond the seemingly good news of the Greek deal, the story isn’t nearly as celebratory. Some economists worry the latest bailout isn’t likely to work better than previous deals, while risks remain that could undermine the deal.

Key take out: Though potential storm clouds loom, the markets for now seem to believe that a deal is a deal, and that an increase to US interest rates in September is still likely.

Key beneficiaries: General investors. Category: Economy.

When the broader US stock market can move by more than two percentage points over a two-day period on news tied to a Greek bailout, it’s fairly evident that Greece’s fate matters to US investors.

Granted, it probably doesn’t matter as much as the barrage of stories about the deal Monday might suggest. Still, it matters.

I have had a chance to quickly scan more than a dozen Greece stories in the past couple of hours. Easily the best of the lot are the ones that at least seek to advance the ball on the story.

And for those who are looking beyond the recent seemingly good news, the story isn’t nearly as celebratory.

piece on The Wall Street Journal’s site quotes economists and analysts who worry that the latest European bailout of Greece isn’t likely to work any better than previous deals in 2010 and 2012.

“It’s just a continuation of failed policy packages, and if anything it’s worse,” the Journal quotes Charles Wyplosz, professor of economics at the Graduate Institute of International Studies, Geneva. “It hasn’t worked, it won’t work.”

The Washington Post weighed in with an excellent piece both explaining the crisis for those who need to be brought up to speed and also looking ahead.

“In the end, Europe’s wealthy powers decided to grant Greece a new lifeline in exchange for new budget-cutting and tax-hiking measures, and Greece is slated to avoid a sudden banking collapse that would probably have forced it out of the 15-year-old currency pact,” writes the Post’s Matt O’Brien.

But looking forward, O’Brien writes that risks remain that could undermine the deal.

“The main dangers ahead appear to be political,” he writes. “The latest round of the crisis, after all, began after Greece elected Syriza, an anti-austerity party, to form the government. It is possible that domestic political upheaval in Greece could, in coming days or months, unravel the agreement with Europe. And given that Greece is now likely to undergo a period of long economic pain, that might increase the risk of political instability.”

More immediately, the process for reopening the banks or easing capital controls, which prevented Greeks from moving money offshore, still needs to be worked out.

Though there are potential storm clouds looming over this deal, the markets for now seem to believe that a deal is a deal and that Greece will remain in the European Union.

Not only have stocks rallied, so has the dollar.

As CNNMoney’s Paul La Monica wrote today, some market watchers had been suggesting that the Fed might hold off on an interest rate hike in September if Greece left the eurozone because that event could destabilise the global financial markets.

“But Steven Englander, a currency strategist at Citigroup, wrote in a report Monday morning that the market is viewing the Greece news as a sign that a September rate increase is still likely,” writes La Monica. “If the Fed raises interest rates in September, then the dollar should continue to gain value against the euro. Higher rates usually lead to a stronger currency.”

In other words, a Greek deal that sticks should translate to greater optimism about the US economy, which would give the Fed the green light to raise interest rates sooner rather than later. A strong US economy coupled with rising short-term rates should help the greenback.

But if that rising dollar scenario plays out, will it help the stock market? Writes La Monica: “It could hurt profits for big multinational companies with significant exposure abroad. That could be a problem for the stock market.”

This piece has been reproduced with permission from Barron's.

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