Make no mistake, the PIGS (Portugal, Ireland, Greece and Spain) economies are in real danger of sovereign default and the only way that can be averted is by forcing all of them to drastically reduce the deficit, meaning to say that the government should cease to play the role of propping up the economy. In the current environment, this would lead most of these economies into another bout of recession. And this will pull the others alongwith. Also, as the risk perception increases, it can lead to an increase in risk premium in the interest rates, which can also slowdown the recovery process.
Essentially what this means is that Euro will continue to be weak. And, by default, the US dollar will strengthen, more so given the likely flight to safety. Since its December low, the dollar has already gained more than 10% vis-à-vis Euro and as a result, the trade weighted dollar index is also moving up. My feeling is that, the dollar will generally remain strong, although it will continue to be volatile, given that the US economy itself is on a weak wicket. However, sustained weakness of the dollar is not on the cards now.