U.S. Dollar and Euro Presented by: Mayra Duque Brian Truong

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

Determinants of the Exchange Rate Trade imbalances power parity 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 Political instability Return on investment Return on investment

Trade Imbalance Source Data: FTD – U.S. Census Bureau

Interest Rates Source data: European Central Bank, Federal Reserve websites

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

U.S. Dollar/Euro Price History: Jan Feb Data Source:

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

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 Real Impacts of the Exchange Rate on the U.S.

Present Trend 2.3%2.2%GDP 7.1%4.9%Unemployment -$58.8bn. -$58.8 bn. Dec Trade Balance 3.2%4.1%Inflation 4%3% Interest Rate EUUS We expect the U.S. dollar to continue to depreciate against the Euro. -1, € mi. Dec. 2007

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

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

Questions? Thank You!