Dollar vs. Euro

1. Dollar vs. Euro Kaitlin Briscoe Doug Durkalski Allison Gott Jen Hooks

2. Fundamental Analysis • Dollar will hit a low around $1.40/€ in mid-2005 • The equilibrium rate is around $1.15/€ • What will cause the dollar to appreciate?

3. In the U.S…. • Capital investment will grow at 3.25% per year, fueling economic/GDP growth • Imbalances in the U.S. current account and households’ propensity to save/spend will have to be corrected • Consumer inflation will fall with declining oil prices (<$40) and recovery in the labor market • Moderate stance toward active monetary policy may be modified if decline in dollar persists • Bottom Line: The dollar will turn around relative to the Euro in the second half of 2005.

4. U.S. Deficit • Export demand unlikely to correct current account deficit on its own… • Central banks will have to get involved and “support” the dollar through purchases! • The worse it gets, the harder it is to correct… • **Concern over extreme decline in dollar halting worldwide economic expansion should provoke central banks to buy (or hold) dollar positions!

5. In Europe… • Economic growth will improve in the second half of the year due to lower oil prices and falling $/€ exchange rate • However, first half of 2005 will not trigger increased demand for U.S. goods • Rising interest rates in U.S. and stagnant rates in Europe should improve the imbalance in the exchange rate

6. Technical Analysis

7. 1 Year Movement

8. 2 Week Movement

9. Moving Averages

10. Other technical indicators… • Relative Strength Indicator (around 70) indicates a bearish outlook for the dollar (although this indicator’s relevance rarely lasts over a week) • Fast Stochastic (around .8) implies that the dollar is currently near an annual high and should be sold