Euro Strong Despite Rising Credit Risk Levels in Eurozone

If you watch world equity markets, volatility, interest rates, consumer confidence and currencies, you would be led to believe that the eurozone crisis is behind us. In reality, the eurozone still has a strong contingency of countries with credit default spread levels that are only held by what we consider "junk" bonds. A spread of 639 bps for Ireland implies a 5-year default probability of 43%!

Credit spreads of 600 are unsustainable for continuous government funding. We witnessed a small decline in credit risk levels in the beginning of 2011, but now they appear to be creeping back up to their highest historic levels.
With the eurozone in such distress, we might expect that the Eurodollar would be taking a beating... in fact we see quite the opposite:

Despite lofty levels in eurozone default probabilities, the euro is up 15% from the June lows.

My question to all investors is why the euro deserves respect in today's markets? You might suggest that the euro is the best alternative to the dollar, but I would contend that the eurozone's financial issues and political gridlock trump any hints of credit risk in US sovereign debt. Nothing has been solved in the eurozone and the credit spreads suggest that we have yet to mitigate the problem.

As an investment strategy you might consider shorting the euro versus the currency of your choice. If you are concerned that the euro will continue to rally, then you can play the outlier bet by selling out of the money call options on the CurrencyShares Euro Trust (FXE).