EUR Group Project 3 Danielle Gardner Garrett McCulloch Donna Zviely

European Central Bank Interest Rates vs. Euro Exchange Rates

Interest Rate Differential vs. Euro Exchange Rate

Dates Interest Rates Changed and Impact on Exchange Rates ECB Interest Rate Changes July Increased from 4% to 4.25% and Exchange Rate fell from 1.57 to 1.35 Oct 2008 – Down to 3.75% and Exchange Rate fell to 1.26 Nov 08 – Down to 3.25% and Exchange rate stayed at 1.28 Dec 08 – Down to 2.5% and Exchange Rate back to 1.40 Jan 09 – Down to 2% and exchange rate fell to 1.27 March 09 – Down to 1.5% and exchange rate up to 1.35 April 09 – Down to 1.25% and exchange rate stays at 1.32 May 09 – Down to 1% and exchange rate increases to 1.40 Interest Rate Differential Changes Jan 08- from.5 to 1% and exchange rate at 1.47 March 08 – up to 1.75% and exchange rate increase from 1.52 to 1.56 April 08 – Increase to 2% and exchange rate stay around 1.56 July 08 – Increase to 2.25% and exchange rate falls to 1.46 October 08 – Increase to 2.75% and exchange rate falls to 1.26 Nov 08 – Falls to 2.25% and exchange rate increases to 1.40 Jan 09 – Falls to 1.75% and exchange rate decreases to 1.27 March 09 – Falls to 1.25% and exchange rate increases to 1.34 April 09 – Falls to 1% and exchange rates stay around 1.33 May 09 – Falls to.75% and exchange rates increase to 1.40

Historical Patterns When the ECB interest rate increased to 4.25% the currency weakened and continued to weaken until it was lowered to 2.5% and then it continued to weaken until the interest rate was around 1.5% where it strengthened slightly and stayed until the interest rate was lowered to 1% and the currency began to strengthen again The euro strengthened until interest rate differential reached 2.25% and then began weakening and as the differential increased exchange rate still weakened and then when the differential was back around 2.25% it began strengthening until it was lowered again and the euro weakened again. Once the interest rate differential reached.75% the euro began strengthening again Little correlation as sometimes the interest rate or interest rate differential decreased led to a strengthening and sometimes led to a weakening of the euro

European Central Bank Meeting “the Governing Council decided to leave the key ECB interest rates unchanged” “the current rates are appropriate” “we confirmed our expectation that price developments over the policy-relevant horizon will remain dampened by the marked weakening of economic activity in the euro area and globally” “following two quarters of very negative growth, economic activity over the remainder of the year is expected to decline at much less negative rates”

ECB Meeting Continued “After a stabilization phase, positive quarterly growth rates are expected by mid- 2010” “available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2%” “we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households” Reference: 009/html/is en.html#qa

US Federal Reserve “In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” “maintain the target range for the federal funds rate at 0 to 1/4 percent” erve.gov/monetarypo licy/files/fomcminutes pdf

The Euro’s Future Move We think that since the ECB Council expects price stability to be maintained over the medium term, the euro is not going to change drastically in the future.