The dollar has rallied in the past two months versus the euro (up 8%) and pound (up about 4%), on renewed concern about sovereign debt in Europe. This time, the concern is about Portugal's debt, and the impact continued credit market woes would have on both euro-zone and United Kingdom GDP growth.
On Tuesday, Portugal's Prime Minister Jose Socrates said his country will not need a bail-out, and its budget deficit will be lower than forecast, Bloomberg News reported. He said rumors that the country needs aid are helping "speculators" while hurting Portugal and driving down the euro.
The euro initially weakened against the dollar before reversing and strengthening about two-tenths of cent to $1.2971 on Tuesday at mid-day; the pound also strengthened about one-half cent to $1.5620.
Market Analysis: The dollar is benefiting from continued sovereign debt concerns, and from an accelerating U.S. economic recovery, which will boost U.S. corporate earnings -- making dollar-denominated investments more attractive.
Put the risk of Portugal accessing bail-out funds at a 2 on scale of 10, with 10 being a full bail-out.
Ireland also strongly denied that it would need a bail-out, before accepting a €85 billion or $111 billion line of credit from European officials. Portugal, however, is in better shape than Ireland. Even so, if investors continue to flee Portuguese debt, interest rates may rise to a point that forces the nation to accept an aid package, which is what happened to Ireland. Among other features, the European Financial Stability Facility's aid to Ireland frees it from having to attract private funds (with their high borrowing rates) for several years.