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The U. S. Dollar – Quo Vadis?

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?

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  1. The U. S. Dollar – Quo Vadis? Dr. Robert T. LeClair John Cabot University Rome, Italy

  2. 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

  3. 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

  4. 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”)

  5. History of European Monetary Union • Qualification standards: • inflation • interest rates • fiscal deficit • national debt

  6. 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

  7. 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

  8. Euro vs. USA[Source: Wall Street Journal, 9/28/98]

  9. $ 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

  10. $ 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) • 2 February 2010: $1.397

  11. $ Value of the Euro (€)

  12. $ Value of the Euro (€)

  13. $ Value of the Euro (€)

  14. $ Value of the Euro (€)

  15. $ Value of the Euro (€)

  16. $ Value of the Euro (€)

  17. $ Value of the Euro (€)

  18. $ Value of the Euro (€)

  19. Euro (€) versus the U. S. $[Interbank Rate – 1/1/99 to 1/1/10]

  20. 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!

  21. Why the weak Euro (€)?Why the strong U. S. Dollar ($)? • Stronger U. S. economic growth • Shrinking U. S. Government deficit

  22. 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 -

  23. What’s Changed to Weaken the $? • Slower U. S. growth

  24. U. S. A. GDP Growth (%), 1993 - 2010

  25. What’s Changed to Weaken the $? • Slower U. S. growth • Large U. S. government deficits

  26. U. S. Budget Deficit/Surplus[1990-2010, $ Billions]

  27. What’s Changed to Weaken the $? • Slower U. S. Growth • Large U. S. Government deficits • Weaker U. S. market returns (S&P 500):

  28. Compound Annual Returns, S & P 500[Ten-Year periods Ending 2001-09]

  29. P/E Ratio, S & P 500 Index (TTM)[Monthly, 1/1/02 – 2/1/10]

  30. 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.”

  31. Political Effect?[U. S. Treasury Secretaries] • Henry Paulson (2006 -2009) – “As I think you know, I believe very strongly that a strongdollar is in our nation’s interest, and I’m a big believer in currencies being set in a competitive, open marketplace.”

  32. Political Effect?[U. S. Treasury Secretaries] • Timothy Geithner(2009 - ) – “A strong dollar is very important to this country, I mean that, and it’s very important that people recognize it. It does bring special responsibilities and burdens on the United States and it’s very important that we make not just Americans but make the world understand that we are going to go back to living within our means.”

  33. 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.”

  34. U. S. Current Account Deficit[1998-2009, Quarterly, ($ Billions)]

  35. 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.”

  36. Foreign Trade (-) and Capital Flows (+)[2005-2009; $ Billions]

  37. Foreign Trade (-) and Capital Flows (+)[2005-2009; $ Billions]

  38. Foreign Holdings of U. S. Treasury Securities Source: U. S. Treasury International Capital (TIC) Reports, monthly [www.treas.gov/tic/mfh.txt]

  39. Total Foreign Holdings of U. S. Treasury Securities, $Bils., 2005-09

  40. Chinese Holdings of U. S. Treasury Securities, $Bils., 2005-09

  41. Japanese Holdings of U. S. Treasury Securities, $Bils. 2005-09

  42. “Oil Exporters” Holdings of U. S. Treasury Securities, $Bils., 2005-09

  43. Major Foreign Holders of U. S. Treasury Securities, $Bils., - November 2009

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