Looking ahead, let’s assume the Greeks pass the austerity plan and the EU comes up with another package at this weekend’s summit.

Should rally the euro, no? Yes it should, and it no doubt will, if it comes to pass.

Then what?

My guess is we get a few weeks of dollar-bashing. There will be screaming headlines about the US debt impasse, reserve diversification out of the dollar and wailing about a too-loose Fed.

We probably rally into the high 1.40s by the middle of July…

I suspect we will then stall somewhere between 1.47 and 1.49 and then the market begins a rethink. Three factors will come into play.

  1. QE2 will have already expired and QE3 will not materialize.
  2. Inflation (or more rightly the anticipation of inflation) , the main driver of dollar sales during the 2008 slide and the 2011 mini-slide, will prove to be less a threat than than the market anticipated. If commodities in general (and oil in particular) does not race higher with a lower dollar, look for the rally to derail.
  3. The market expects very little in the way of fiscal restraint out of Washington. I believe it is mistaken. Obama is in self-preservation mode and will look to the Clinton model of the 1990s and tack toward the middle after a very fiscally lax first 30 months in office. The 2012 election is in sight and if he wants to get reelected, he will have to appease Main Street which is very unsettled by endless $1.5 trln deficits. Default will be avoided and meaningful cuts will be agreed this summer.

Short-term pain and long-term gain for the dollar is my view. Tomorrow’s conventional wisdom today…