EURO: Past, Present, & Future

1. EURO: Past, Present, & Future Chad Bassett Brett Hummel Brendan Kaag Chris Murphy

2. Who are the European Players? Special Status Countries Member Countries • Belgium • Germany • Greece • Spain • France • Ireland • Italy • Luxembourg • The Netherlands • Austria • Portugal • Finland -Denmark -Sweden -United Kingdom The National Central Banks of the European Union and the European Central Bank makes up the European System of Central Banks. EU member countries who are not participating have special status that allows them to set their own monetary policy.

3. The evolution of the Euro starts with treaties created by the European Council The European Council is composed of heads of states of each member state of the EU The treaties were then ratified by the legislative procedure of each member country. 1957 – Treaty of Rome - Declared a common European Market as an Objective 1986 – The Single European Act - Added on the Treaty of Rome 1992 – Treaty on European Union - Helped Create the Economic and Monetary Union History of the Euro

4. Implementing the Euro • On January, 1, 1999, the exchange rate between • member country currency and the Euro was • irrevocably set • -On January, 1, 2001, Greece adopted the Euro • -On January, 1, 2002, the Euro became the official • currency of the 12 participating countries • -The main source of distribution for the Euros was • through ATM’s, banks, post offices and as change • through retail operations • -Member countries required all old currency to be • exchanged by a given date • -The new Euro system was a huge feat and the • largest currency change and integration in • history

5. Fundamental Analysis • US dollar against Euro vulnerable because… • Further US budget depreciation • Increase market concerns for $ • Budget deficit too big • Decrease foreign interest in American goods • Inability to capitalize on upbeat US economic data • Banks diversifying reserves out of $ into other currencies • E.g. – South Korea, Russia • Terrorism/War in Iraq • Countries look for more stable currency (like the Euro)

6. Fundamental Analysis • Dollar could be strong against Euro in short run • Disappointing Euro-zone growth • Help underpin the dollar • Covering of short hedge-fund positions could propel the dollar higher • Fast rate of increasing Fed interest rate

7. Short Term Outlook • We ultimately feel that over the short term the US Dollar will depreciate against the Euro. • While the dollar has rallied over the past few months it has been hit hard over the past two weeks. • In most people’s minds the Euro serves as the ‘anti-dollar’, so since the world market as been so bearish against the US economy, it helps the Euro.

8. Short Term Outlook • Other factors contributing to the dollar depreciation is the massive influx in supply of dollars around the world. • It has recently been announced by the Russian and Middle Eastern central banks that they have been diversifying into other currency denominated assets. • In the past few days, South Korea, the fourth largest holder of dollars in Asia, has also announced it will diversify it’s nearly $200 billion in dollar assets.

9. Short Term Outlook • Another factor that could further exacerbate the situation is that the Treasury announced that today, February 23rd, they will sell an additional $24 bn in two-year Treasury notes. • As Tohru Sasaki the chief forex strategist at JP Morgan Chase Bank in Tokyo said: “There has been a pattern of the dollar being bought on strong data, but retreating right away, particularly against the euro.” • There is currently so much supply of dollars and not enough demand, and this is why we think the dollar will continue to fall. • We predict that the dollar will fall to around $1.34/E.

10. Bush’s “Strong Dollar Policy” • “The policy of my government is a strong dollar policy” • Plans to “send a signal” to the financial markets that he is committed to a “strong dollar policy” – cut deficit in half • Plans to work with Congress to reduce the US deficits, including Social Security • “Markets should make their own decision about the relationship between the Euro & the Dollar” – never intervened with markets • Currently on 5-day European tour to urge Trans-Atlantic cooperation

11. Changes Need To Be Made • Weak dollar has hurt European exports and economic growth • Hurts European tourism • White House encouraging weak dollar? • Questions about future of Social Security • Long-term government borrowing – low saving rates in US

12. Long-Term Outlook 2 Year Euro to US Dollar Exchange Rate

13. Long-Term Outlook 3 Month Euro to US Dollar Exchange Rate

14. Long-Term Outlook • Despite partial recovery during the last 6 weeks, the dollar is still expected to depreciate • Corporations still hold long positions in Euro (=strength) – no major changes in hedge strategies • 1.36 $/E to 1.30 $/E in 2005= “pause that refreshes the Euro” • US trade deficits are still increasing

15. Drug Dealers Euro Trash by: Daniel Gross • One of greenback’s biggest fans turning to Euro • In past 2 years, Euros easier to carry, store, and hide • Printing 200E and 500E • Euro most accepted currency in Cuba to support families • Part of long-standing & faithful base

16. Major Players Affected Organized Crime

17. Major Players Affected Normal Drug Dealers

18. Major Players Affected John “Stive $” Stiver

19. Long-Term Outlook • Bush has not made any concrete actions to aid the dollar • Experts and analysts believe the dollar will continue to depreciate compared to the Euro due to increasing deficits • Therefore, in the long run (2 years), the exchange rate will be: 1.40 $/E