Dollar vs. EuroDollar vs. Euro

Kaitlin BriscoeKaitlin BriscoeDoug DurkalskiDoug Durkalski

Allison GottAllison GottJen HooksJen Hooks

Fundamental AnalysisFundamental Analysis

Dollar will hit a low around $1.40/Dollar will hit a low around $1.40/€ in mid-€ in mid-20052005

The equilibrium rate is around $1.15/The equilibrium rate is around $1.15/€€

What will cause the dollar to appreciate?What will cause the dollar to appreciate?

In the U.S….In the U.S….• Capital investment will grow at 3.25% per year, Capital investment will grow at 3.25% per year,

fueling economic/GDP growthfueling economic/GDP growth• Imbalances in the U.S. current account and Imbalances in the U.S. current account and

households’ propensity to save/spend will have households’ propensity to save/spend will have to be correctedto be corrected

• Consumer inflation will fall with declining oil Consumer inflation will fall with declining oil prices (<$40) and recovery in the labor marketprices (<$40) and recovery in the labor market

• Moderate stance toward active monetary policy Moderate stance toward active monetary policy may be modified if decline in dollar persistsmay be modified if decline in dollar persists

• Bottom Line: The dollar will turn around relative Bottom Line: The dollar will turn around relative to the Euro in the second half of 2005.to the Euro in the second half of 2005.

U.S. DeficitU.S. Deficit

Export demand unlikely to correct current account Export demand unlikely to correct current account deficit deficit on its own…on its own…

Central banks will have to get involved and Central banks will have to get involved and “support” the dollar through purchases!“support” the dollar through purchases!

The worse it gets, the harder it is to correct…The worse it gets, the harder it is to correct… **Concern over extreme decline in dollar halting **Concern over extreme decline in dollar halting

worldwide economic expansion should provoke worldwide economic expansion should provoke central banks to buy (or hold) dollar positions!central banks to buy (or hold) dollar positions!

In Europe…In Europe…

Economic growth will improve in the Economic growth will improve in the second half of the year due to lower oil second half of the year due to lower oil prices and falling $/prices and falling $/€ exchange rate€ exchange rate

However, first half of 2005 will not trigger However, first half of 2005 will not trigger increased demand for U.S. goodsincreased demand for U.S. goods

Rising interest rates in U.S. and stagnant Rising interest rates in U.S. and stagnant rates in Europe should improve the rates in Europe should improve the imbalance in the exchange rateimbalance in the exchange rate

Technical AnalysisTechnical Analysis

Dollars per Euro Exchange Rate

0.700

0.800

0.900

1.000

1.100

1.200

1.300

1.400

Jan-99

Jul-99

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Time

Do

lla

rs p

er

Eu

ro

1 Year Movement1 Year Movement

                                                                                                             

2 Week Movement2 Week Movement

Moving AveragesMoving Averages

Moving Averages $ per Euro

-0.2000

0.0000

0.2000

0.4000

0.6000

0.8000

1.0000

1.2000

1.4000

Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04

Tim e

Do

llars

per

Eu

ro 26 Day Moving Average

9 Day Moving Average

MACD

Other technical indicators…Other technical indicators…

Relative Strength Indicator (around 70) Relative Strength Indicator (around 70) indicates a bearish outlook for the dollar indicates a bearish outlook for the dollar (although this indicator’s relevance rarely (although this indicator’s relevance rarely lasts over a week)lasts over a week)

Fast Stochastic (around .8) implies that Fast Stochastic (around .8) implies that the dollar is currently near an annual high the dollar is currently near an annual high and should be soldand should be sold