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U.S. Dollar and Euro Presented by: Mayra Duque Brian Truong. Determinants of Exchange Rates Consider Current USD/Euro Trend Past Trend of USD/Euro. Impact of Exchange Rates Factors of International Currencies Outlook for Both Currencies. Purpose. Trade imbalances power parity

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Presentation Transcript
purpose
Determinants of Exchange Rates

Consider Current USD/Euro Trend

Past Trend of USD/Euro

Impact of Exchange Rates

Factors of International Currencies

Outlook for Both Currencies

Purpose
determinants of the exchange rate
Trade imbalances

power parity

(restrictions, non-tradable, imperfect competition, and trade imbalances)

Interest rates

Higher relative interest rates = more demand

Inflation

Higher relative inflation = less demand

Foreign exchange traders

Market expectations

Political instability

Return on investment

Determinants of the Exchange Rate
trade imbalance

Trade Imbalance

Source Data: FTD – U.S. Census Bureau

interest rates
Interest Rates

Source data: European Central Bank, Federal Reserve websites

inflation
Inflation

Source Data: European Central Bank, U.S. Bureau of Labor Statistics websites

theoretical impact of the exchange rate
Theoretical Impact of the Exchange Rate
  • U.S. Net export should increase
  • Change in industries & business
    • European Car makers (more FDI in US?)
  • External purchasing power of US residents should decline
  • Inflationary Pressure for US residents
real impacts of the exchange rate on the u s
Real Impacts of the Exchange Rate on the U.S.
  • Net export decreased
    • Net exports fell from -$58 bill. to -$107 bill. from 2000 to 2007
    • Exports increased but outpaced by imports
  • US residents are not traveling less
    • Travel has increased both ways
  • Inflation in check
    • Inflation rate not much higher than 2000
present trend

US

EU

Interest Rate

3%

4%

Inflation

4.1%

3.2%

Trade Balance

-$58.8bn.

Dec. 2007

GDP

2.2%

2.3%

Unemployment

4.9%

7.1%

Present Trend

-1,9747.7 € mi.

Dec. 2007

We expect the U.S. dollar to continue to depreciate against the Euro.

requirements of international currencies
Requirements of International Currencies
  • Facilitate international transactions
  • Must be stable
  • Must be economically large and important
  • Must be widely traded
international currencies cont
Advantages

Issuance of seignorage

Save transaction costs

More business for financial institutions

Convenience for citizens

Political power and prestige

Disadvantages

Domestic products more expensive

Domestic currency circulating abroad cannot be controlled

Burden of responsibility

International Currencies Cont.
euro regional or global entity
Euro: Regional or Global Entity?
  • Euro second reserve currency
  • Used in trade by those who have institutional ties
  • If Denmark, Sweden, and U.K. (EU15) it will surpass the U.S. in economic size
  • Need for structural adjustments, political/social unity, integration of capital markets
end of u s hegemony
Shift to multiple reserve currency

Move away from pegging to the dollar

Commodities like oil are invoiced in other

Asian countries financial/monetary cooperation

If enough EU members

If dollar keeps depreciating and inflation decreases confidence

Foreign Central Banks hold U.S. reserves

End of U.S. Hegemony?
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