Montreal, Canada

According to Bloomberg, bearish bets against the EUR by hedge funds and other institutional investors hit an all-time high this month at $7.6 billion dollars. That's the highest dollar concentration of bets against the single European currency since its introduction in 1999.

Massive bearish bets are indicative of a heavily overbought U.S. dollar. Or alternatively, is the EUR still vulnerable to further selling ahead of a possible interest rate cut?

The odds Greece will default on its debt obligations are highly unlikely. Credit spreads comparing German government debt versus Greek bonds remain elevated; Greece, despite murmurings to the contrary, has not failed to meet its ongoing debt financing requirements thus far with about $70 billion dollars required to close its funding gap in fiscal 2010.

Some of the best contrarian trades now include buying long-term Greek government bonds and going long the EUR on that same purchase. Not that I want to own Greek bonds – but some traders are biting at these levels. I also don't like the EUR. In Europe, the only unit I would buy at these levels is the Norwegian krone – the biggest surplus currency in Europe.

The Germans and the European Central Bank (ECB) won't let Greece default because the spillover would be disastrous for weaker euro-zone sovereign credits, namely Spain, Ireland and Portugal. Other heavily indebted nations include Belgium and Italy. Outside of the single currency zone, the United Kingdom is awash in debt with its bail-out bill costing more than the entire economy generated in GDP in 2009.

It's also worth noting that European governments continue to struggle to meet debt-financing.

Government auctions remain poorly bid since late 2008 with failed auctions in several countries, including more than four scrapped sales in Germany. Other countries like Latvia and Poland have also struggled with failed auctions since 2009.

European governments plan to raise more than $3 trillion dollars in 2010, and, increasingly, it looks like creditors don't want to treat all euro-zone issuers with the same credit risk as defined by credit default swap rates. But if Germany is struggling to sell its debt what does that portend for weaker balance sheets in the euro-zone and those on the periphery?

The ECB continues to drive home its message of deficit restraint. Markets are pressuring governments to control their budget deficits at a time when curtailing debt issuance for social welfare programs and bailouts would harm a nascent economic recovery in Europe; cutting spending now risks igniting another wave of deflation. The odds are very high that the Europeans will bungle this recovery as pressure mounts to cut spending as a percentage of GDP.

The next move by the ECB might be a rate cut, not a rate hike. The dollar might be discounting this policy action at a time when the bears are running wild shorting the single European currency. This time, speculators are right to dump euro.