Currency market says Europe is just fine

Although 2011 was filled with financial news, nothing dominated the year like the European debt crisis. Will Greece, Spain, Italy or others default and bring down the rest of the global economy? Will the euro collapse? European leaders may have agreed late last week to a new fiscal compact, but those burning questions remain.

I can't say for certain whether the common currency will collapse, but I can tell you financial markets don't think it's likely at all.

If I had a crystal ball and known a year ago that the European Union would have become the center of the global financial crisis, I'd have shorted the euro big time. In this case, I'm lucky I don't have a crystal ball, because for the year-to-date, the euro is up about 2 percent vs. the U.S. dollar, according to Oanda.com. See the chart below:

Since the launch of the euro in 1995, the currency has gained about 13 percent vs. the dollar. There's always the possibility that the market is wrong and the euro is grossly overvalued, but I don't believe I'm smarter than the market. Or maybe it's just a case where the U.S. debt crisis is perceived as being worse than that of the EU.

Reality check

My point is that we need to take a step back from all of the financial news the media throws at us and apply a reality check. The currency markets clearly don't buy the media hype of the collapse of the euro.

This is similar to the media hype following the S&P downgrade of the U.S., which was blamed for a market plunge of nearly 7 percent on the first trading day after the announcement. The reality check here is that U.S. Treasuries soared that day, making it much cheaper for the suddenly "riskier" U.S. government to borrow funds.

I don't know if markets are always rational, but I do know they can surprise us -- and nearly always do.