Currency: Where is Euro heading and how does it affect us?

Everyday, we are hearing about problems in Greece. But, why should their problems affect asian countries like us when our stock market and property market are booming like no tomorrow? Anyway, Greece's GDP is only US$300 to 400 billion. That is about the size of both Malaysia's and Singapore's GDP added together. So, imagine problem in Singapore and Malaysia is going to rock the whole world. Impossible, right!

Now then, why is the stock market so worried? This is because the problem is more than meets the eye. Greece is just the beginning. You may have heard about PIGS - "not pigs" but Portugal, Ireland, Greece and Spain. The financial markets are worried that these countries may not be able to pay their debts that are going to due soon. Their combined GDP is about US$2.5 trillion. That is almost the size of UK's GDP. If they fail to repay their debts, investors will lose confidence in Europe and the Euro currency will definitely take a major hit.

So, who or what will benefit from this? USD !! USD will shoot to the roof because of uncertainty. Without Euro, USD will also be the only effective liquid reserve currency remaining in the world.

We are in Asia. This is between US and Europe. So, why worry? No, our stock market and property market have been driven up by liquidity and cheap money all these while. Money has been flowing from overseas into Asia because they have no other place to park and invest it. Japan is having recession, so is Europe. The only reasonable place to invest will be Asia and a large part of these money are borrowed in USD at very low interest rate. We called that carry trade. Imagine what will these investors do if USD were to appreciate suddenly to sky high level. Since they have borrowed in USD, they will have to repay in USD. In order not to suffer substantial losses due to unfavourable exchange rate, they will liquidate their holdings in stock market and property market. There will be bloodbath.

So, now, you see. Everything is inter-related. One thing can lead to many things. That is why the world is so big and yet so small.