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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
$ 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) • 1 October 2009: $1.455
Euro (€) versus the U. S. $[Interbank Rate – 1/1/99 to 10/1/09]
Who Needs Dollars? • People who want to … • buy U. S. goods and services • invest in U. S. assets • travel to the U. S. • Anyone who wants to buy oil!
Why the weak Euro (€)?Why the strong U. S. Dollar ($)? • 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
What’s Changed to Weaken the $? • Slower U. S. growth • Large U. S. government deficits
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 2001-08]
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 strong dollar is in our nation’s interest, and I’m a big believer in currencies being set in a competitive, open marketplace.”
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., - July 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