EURO: Past, Present, & EURO: Past, Present, & FutureFuture

Chad BassettChad BassettBrett HummelBrett HummelBrendan KaagBrendan KaagChris MurphyChris Murphy

Who are the European Players?

-Belgium-Germany-Greece-Spain-France-Ireland-Italy-Luxembourg-The Netherlands-Austria-Portugal-Finland

Member Countries Special Status Countries

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.

-Denmark-Sweden-United Kingdom

History of the EuroHistory of the Euro

The evolution of the The evolution of the Euro starts with treaties Euro starts with treaties created by the created by the European CouncilEuropean Council

The European Council The European Council is composed of heads is composed of heads of states of each of states of each member state of the EUmember state of the EU

The treaties were then The treaties were then ratified by the ratified by the legislative procedure of legislative procedure of each member country.each member country.

1957 – Treaty of Rome1957 – Treaty of Rome - Declared a common - Declared a common

European Market as an ObjectiveEuropean Market as an Objective

1986 – The Single 1986 – The Single European ActEuropean Act

- Added on the Treaty of - Added on the Treaty of RomeRome

1992 – Treaty on European 1992 – Treaty on European UnionUnion

- Helped Create the - Helped Create the Economic and Monetary UnionEconomic and Monetary Union

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

Fundamental AnalysisFundamental Analysis

US dollar against Euro vulnerable because…US dollar against Euro vulnerable because… Further US budget depreciationFurther US budget depreciation

Increase market concerns for $Increase market concerns for $ Budget deficit too bigBudget deficit too big Decrease foreign interest in American goodsDecrease foreign interest in American goods Inability to capitalize on upbeat US economic dataInability to capitalize on upbeat US economic data

Banks diversifying reserves out of $ into other currenciesBanks diversifying reserves out of $ into other currencies E.g. – South Korea, RussiaE.g. – South Korea, Russia

Terrorism/War in IraqTerrorism/War in Iraq Countries look for more stable currency (like the Euro)Countries look for more stable currency (like the Euro)

Fundamental AnalysisFundamental Analysis

Dollar could be strong against Euro in Dollar could be strong against Euro in short runshort run

Disappointing Euro-zone growthDisappointing Euro-zone growthHelp underpin the dollarHelp underpin the dollar

Covering of short hedge-fund positions Covering of short hedge-fund positions could propel the dollar highercould propel the dollar higher

Fast rate of increasing Fed interest rateFast rate of increasing Fed interest rate

Short Term OutlookShort Term Outlook

We ultimately feel that over the short term We ultimately feel that over the short term the US Dollar will depreciate against the Euro.the US Dollar will depreciate against the Euro.

While the dollar has rallied over the past few While the dollar has rallied over the past few months it has been hit hard over the past two months it has been hit hard over the past two weeks.weeks.

In most people’s minds the Euro serves as the In most people’s minds the Euro serves as the ‘anti-dollar’, so since the world market as ‘anti-dollar’, so since the world market as been so bearish against the US economy, it been so bearish against the US economy, it helps the Euro.helps the Euro.

Short Term OutlookShort Term Outlook

Other factors contributing to the dollar Other factors contributing to the dollar depreciation is the massive influx in depreciation is the massive influx in supply of dollars around the world. supply of dollars around the world.

It has recently been announced by the It has recently been announced by the Russian and Middle Eastern central banks Russian and Middle Eastern central banks that they have been diversifying into other that they have been diversifying into other currency denominated assets.currency denominated assets.

In the past few days, South Korea, the In the past few days, South Korea, the fourth largest holder of dollars in Asia, has fourth largest holder of dollars in Asia, has also announced it will diversify it’s nearly also announced it will diversify it’s nearly $200 billion in dollar assets.$200 billion in dollar assets.

Short Term OutlookShort Term Outlook

Another factor that could further exacerbate the Another factor that could further exacerbate the situation is that the Treasury announced that today, situation is that the Treasury announced that today, February 23February 23rdrd, they will sell an additional $24 bn in , they will sell an additional $24 bn in two-year Treasury notes.two-year Treasury notes.

As Tohru Sasaki the chief forex strategist at JP As Tohru Sasaki the chief forex strategist at JP Morgan Chase Bank in Tokyo said: “There has been Morgan Chase Bank in Tokyo said: “There has been a pattern of the dollar being bought on strong data, a pattern of the dollar being bought on strong data, but retreating right away, particularly against the but retreating right away, particularly against the euro.”euro.”

There is currently so much supply of dollars and not There is currently so much supply of dollars and not enough demand, and this is why we think the dollar enough demand, and this is why we think the dollar will continue to fall. will continue to fall.

We predict that the dollar will fall to around We predict that the dollar will fall to around $1.34/E.$1.34/E.

Bush’s “Strong Dollar Bush’s “Strong Dollar Policy”Policy”

““The policy of my government is a strong dollar The policy of my government is a strong dollar policy”policy”

Plans to “send a signal” to the financial Plans to “send a signal” to the financial markets that he is committed to a “strong markets that he is committed to a “strong dollar policy” – cut deficit in halfdollar policy” – cut deficit in half Plans to work with Congress to reduce Plans to work with Congress to reduce the US deficits, including Social Securitythe US deficits, including Social Security ““Markets should make their own decisionMarkets should make their own decisionabout the relationship between the Euro &about the relationship between the Euro &the Dollar” – never intervened with marketsthe Dollar” – never intervened with markets Currently on 5-day European tour to urge Trans-Currently on 5-day European tour to urge Trans-

Atlantic cooperationAtlantic cooperation

Changes Need To Be MadeChanges Need To Be Made

Weak dollar has hurt European exports Weak dollar has hurt European exports and economic growth and economic growth

Hurts European tourismHurts European tourism White House encouraging weak dollar?White House encouraging weak dollar? Questions about future of Social SecurityQuestions about future of Social Security Long-term government borrowing – low Long-term government borrowing – low

saving rates in USsaving rates in US

Long-Term OutlookLong-Term Outlook

2 Year Euro to US Dollar Exchange Rate2 Year Euro to US Dollar Exchange Rate

Long-Term OutlookLong-Term Outlook

3 Month Euro to US Dollar Exchange Rate3 Month Euro to US Dollar Exchange Rate

Long-Term OutlookLong-Term Outlook

Despite partial recovery during the last 6 Despite partial recovery during the last 6 weeks, the dollar is still expected to weeks, the dollar is still expected to depreciatedepreciate

Corporations still hold long positions in Corporations still hold long positions in Euro (=strength) – no major changes in Euro (=strength) – no major changes in hedge strategieshedge strategies

1.36 $/E to 1.30 $/E in 2005= “pause that 1.36 $/E to 1.30 $/E in 2005= “pause that refreshes the Euro”refreshes the Euro”

US trade deficits are still increasingUS trade deficits are still increasing

Drug DealersDrug DealersEuro Trash by: Daniel GrossEuro Trash by: Daniel Gross

One of greenback’s biggest fans One of greenback’s biggest fans turning to Euroturning to Euro

In past 2 years, Euros easier to carry, In past 2 years, Euros easier to carry, store, and hidestore, and hide

Printing 200E and 500EPrinting 200E and 500E Euro most accepted currency in Cuba Euro most accepted currency in Cuba

to support familiesto support families Part of long-standing & faithful basePart of long-standing & faithful base

Major Players AffectedMajor Players Affected

Organized Crime

Major Players AffectedMajor Players Affected

Normal Drug Dealers

Major Players AffectedMajor Players Affected

John “Stive $” Stiver

Long-Term OutlookLong-Term Outlook

Bush has not made any concrete Bush has not made any concrete actions to aid the dollaractions to aid the dollar

Experts and analysts believe the dollar Experts and analysts believe the dollar will continue to depreciate compared will continue to depreciate compared to the Euro due to increasing deficitsto the Euro due to increasing deficits

Therefore, in the long run (2 years), Therefore, in the long run (2 years), the exchange rate will be:the exchange rate will be:1.40 $/E1.40 $/E