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The U. S. Dollar – Quo Vadis?. Dr. Robert T. LeClair John Cabot University Rome, Italy. Headlines. “Dollar faltering after seven years as leading currency” - USA Today May 30, 2002

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The U. S. Dollar – Quo Vadis?

Dr. Robert T. LeClair

John Cabot University

Rome, Italy


Headlines

  • “Dollar faltering after seven years as leading currency” -USA Today May 30, 2002

  • “Dollar’s Drop Shows Loss of Faith in U. S. Economy” -Wall Street Journal (Europe)June 3, 2002


Headlines

  • “Dollar hits 14-month low versus Euro” -FinancialTimes May 28, 2002

  • “There are signs that the U. S. primacy as an investment location is now under threat” -Financial Times May 31, 2002


History of European Monetary Union

  • Maastricht Treaty (2 Feb. 1992)

  • Single Central Bank: (1 June 1998)

    • European Central Bank (ECB)

    • Frankfurt, Germany

    • www.ecb.int/home/

  • Single European currency (“Euro”)


History of European Monetary Union

  • Qualification standards:

    • inflation

    • interest rates

    • fiscal deficit

    • national debt


EMU Convergence Criteria

  • Inflation: no more than 1.5% above avg. of three members with lowest rate

  • L-T interest rate: no more than 2% above avg. of three members with lowest rate

  • Fiscal deficit: no more than 3% of GDP

  • Govt. debt: no more than 60% of GDP


History of the Euro (€)

  • Officially introduced: 1 Jan 1999

  • Currency and coins introduced: 1 Jan 2002

  • “Legacy” currencies (Franc, Mark, Lira, etc.) no longer legal tender after 28 Feb 2002


Euro vs. USA[Source: Wall Street Journal, 9/28/98]


$ Value of the Euro (€)

  • Quick Quiz:

  • What would you have paid to buy one Euro (€) on January 1, 1999?

    • A. more than $1.00

    • B. exactly $1.00

    • C. less than $1.00


$ Value of the Euro (€)

  • 1 January 1999: $1.1719

  • 26 October 2000: $0.8228 (low)

  • 1 January 2002: $0.8920

  • 22 April 2008: $1.6018 (high trade)

  • 24 April 2008: $1.5952 (high close)

  • 2 February 2010: $1.397


$ Value of the Euro (€)


$ Value of the Euro (€)


$ Value of the Euro (€)


$ Value of the Euro (€)


$ Value of the Euro (€)


$ Value of the Euro (€)


$ Value of the Euro (€)


$ Value of the Euro (€)


Euro (€) versus the U. S. $[Interbank Rate – 1/1/99 to 1/1/10]


Who Needs Dollars?

  • People who want to …

    • buy U. S. goods and services

    • invest in U. S. assets

    • travel to the U. S.

  • Anyone who wants to buy oil!


Why the weak Euro (€)?Why the strong U. S. Dollar ($)?

  • Stronger U. S. economic growth

  • Shrinking U. S. Government deficit


Why the weak Euro (€)?Why the strong U. S. Dollar ($)?

  • Stronger U. S. economic growth

  • Shrinking U. S. Government deficit

  • Strong U. S. stock market performance; compound annual returns for ten years ended -


What’s Changed to Weaken the $?

  • Slower U. S. growth


U. S. A. GDP Growth (%), 1993 - 2010


What’s Changed to Weaken the $?

  • Slower U. S. growth

  • Large U. S. government deficits


U. S. Budget Deficit/Surplus[1990-2010, $ Billions]


What’s Changed to Weaken the $?

  • Slower U. S. Growth

  • Large U. S. Government deficits

  • Weaker U. S. market returns (S&P 500):


Compound Annual Returns, S & P 500[Ten-Year periods Ending 2001-09]


P/E Ratio, S & P 500 Index (TTM)[Monthly, 1/1/02 – 2/1/10]


Political Effect?

  • U. S. Treasury Secretaries:

  • Robert E. Rubin(1995-1999) – “strong dollar”

  • Lawrence H. Summers(1999-01) – “strong dollar”

  • Paul H. O’Neill(2001-02) – “market decides the value of the dollar”

  • John W. Snow(2003-06) – “A strong dollar is in the national interest.”


Political Effect?[U. S. Treasury Secretaries]

  • Henry Paulson (2006 -2009) – “As I think you know, I believe very strongly that a strongdollar is in our nation’s interest, and I’m a big believer in currencies being set in a competitive, open marketplace.”


Political Effect?[U. S. Treasury Secretaries]

  • Timothy Geithner(2009 - ) – “A strong dollar is very important to this country, I mean that, and it’s very important that people recognize it. It does bring special responsibilities and burdens on the United States and it’s very important that we make not just Americans but make the world understand that we are going to go back to living within our means.”


Achilles Heel?[Financial Times, May 31, 2002]

  • “The Achilles heel of the US dollar has been the bulging current account deficit, which is expected to reach $465bn (€516bn) this year.”


U. S. Current Account Deficit[1998-2009, Quarterly, ($ Billions)]


Achilles Heel?[Financial Times, May 31, 2002]

  • This means the US needs to attract $1.3bn in overseas funds everyday to prevent the dollar from falling.”


Foreign Trade (-) and Capital Flows (+)[2005-2009; $ Billions]


Foreign Trade (-) and Capital Flows (+)[2005-2009; $ Billions]


Foreign Holdings of U. S. Treasury Securities

Source: U. S. Treasury International Capital (TIC) Reports, monthly

[www.treas.gov/tic/mfh.txt]


Total Foreign Holdings of U. S. Treasury Securities, $Bils., 2005-09


Chinese Holdings of U. S. Treasury Securities, $Bils., 2005-09


Japanese Holdings of U. S. Treasury Securities, $Bils. 2005-09


“Oil Exporters” Holdings of U. S. Treasury Securities, $Bils., 2005-09


Major Foreign Holders of U. S. Treasury Securities, $Bils., - November 2009


Concerns About the US Economy?

  • Corporate governance and accounting standards (Enron; WorldCom; Xerox)

  • Productivity gains have not translated into higher corporate profitability

  • Surge in government spending …could depress economic growth


Impact of a Weaker U. S. Dollar[Disadvantages]

  • Foreign goods more expensive

  • Foreign investment more expensive

  • Foreign travel more expensive

  • U. S. interest rates – higher; less foreign capital


Impact of a Weaker U. S. Dollar[Advantages]

  • American products are more competitive abroad; increased exports; lower U. S. trade deficit

  • U. S. A. manufacturing sector more competitive

  • Increased return on U. S. overseas investments


Return on Overseas Investments


Return on Overseas Investments


Return on Overseas Investments


Where Do We Go From Here?

  • “Dollar slips to all-time low ($1.3667) vs. Euro”

    • Associated Press

    • December 31, 2004

  • “Bears are betting on a decline in the dollar.”

    • Barron’s

    • August 21, 2006


  • Where Do We Go From Here?

    • “OFF THE CHARTS; Dollar Sinks the Lowest Since It Started to Float”

      • The New York Times

      • September 22, 2007

  • “Fear of European Slump As Currency Sets Record”

    • The New York Times

    • September 22, 2007


  • Where Do We Go From Here?

    • “As Dollars Pile Up, Uneasy Traders Lower the Currency’s Value”

      • The New York Times

      • May 23, 2009


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