The True Test for the Dollar

LONDON (TheStreet -- In forex trading in July, the euro and other major currencies faced resistance to upward moves against the dollar, and when the euro break occurred at the end of last month, the market retraced the upside move quickly. This was because most market participants, and some important analysts, believed that the euro zone economy would lag the U.S. when the global recovery began, and recent headlines indicate that phase has begun.

However, Thursday's economic reports have shown that things are not so simple. Europe's economic powerhouse, Germany, reported much better-than-expected second-quarter GDP, and in a surprise, the economy actually expanded from the first to the second quarter. Similar numbers came from the major European economies, with France's economy expanding 0.3% in the second quarter.

This strength means the dollar once again may come under pressure, although the real threat to its value lies elsewhere, as we will explain later.

During the credit crisis, the euro zone and the European Central Bank had to face some tough challenges, starting with the call that the area would split in two because of the imminent bankruptcy of the whole financial system. At first, Italy, Spain and Greece were supposed to leave the euro zone, in response to how the ECB was trying to fight inflation.

Soon after, things leveled in Italy and Greece, leaving only Spain as the "Group of One" that wanted out. But it's unlikely that Spain really will push to leave the euro zone because it alone would then have to deal with consequences of rebalancing finances, taxation and currency reserves.