Transcript The US Dollar * Quo Vadis?

The U. S. Dollar – Quo Vadis?
Dr. Robert T. LeClair
Villanova University
John Cabot University
Rome, Italy
1-1-1999
1-1-2001
5-1-2004
1-1-2007
Austria (€)
Belgium (€)
Denmark (ERM-II)
Finland (€)
France (€)
Germany (€)
Great Britain (£)
Ireland (€)
Italy (€)
Luxembourg (€)
Netherlands (€)
Portugal (€)
Spain (€)
Sweden (SKr)
7-1-2013
1-1-1999
Austria (€)
1-1-2001
5-1-2004
1-1-2007
Greece (€)
Belgium (€)
Denmark (ERM-II)
Finland (€)
France (€)
Germany (€)
Great Britain (£)
Ireland (€)
Italy (€)
Luxembourg (€)
Netherlands (€)
Portugal (€)
Spain (€)
Sweden (SKr)
7-1-2013
1-1-1999
Austria (€)
1-1-2001
Greece (€)
5-1-2004
Cyprus (€) [1/08]
Belgium (€)
Czech Republic
Denmark (ERM-II)
Estonia (€) [1/11]
Finland (€)
Hungary (Ft)
France (€)
Latvia (€) [1/14]
Germany (€)
Lithuania (€) [1/15]
Great Britain (£)
Malta (€) [1/08]
Ireland (€)
Poland (Zloty)
Italy (€)
Slovakia (€) [1/09]
Luxembourg (€)
Slovenia (€) [1/07]
Netherlands (€)
Portugal (€)
Spain (€)
Sweden (SKr)
1-1-2007
7-1-2013
1-1-1999
Austria (€)
1-1-2001
1-1-2007
Cyprus (€) [1/08]
Bulgaria (BGN)
Belgium (€)
Czech Republic
Romania (RON)
Denmark (ERM-II)
Estonia (€) [1/11]
Finland (€)
Hungary (Ft)
France (€)
Latvia (€) [1/14]
Germany (€)
Lithuania (€) [1/15]
Great Britain (£)
Malta (€) [1/08]
Ireland (€)
Poland (Zloty)
Italy (€)
Slovakia (€) [1/09]
Luxembourg (€)
Slovenia (€) [1/07]
Netherlands (€)
Portugal (€)
Spain (€)
Sweden (SKr)
Greece (€)
5-1-2004
7-1-2013
1-1-1999
Austria (€)
1-1-2001
1-1-2007
Cyprus (€) [1/08]
Bulgaria (BGN)
Belgium (€)
Czech Republic
Romania (RON)
Denmark (ERM-II)
Estonia (€) [1/11]
Finland (€)
Hungary (Ft)
France (€)
Latvia (€) [1/14]
Germany (€)
Lithuania (€) [1/15]
Great Britain (£)
Malta (€) [1/08]
Ireland (€)
Poland (Zloty)
Italy (€)
Slovakia (€) [1/09]
Luxembourg (€)
Slovenia (€) [1/07]
Netherlands (€)
Portugal (€)
Spain (€)
Sweden (SKr)
Greece (€)
5-1-2004
7-1-2013
Croatia (Kuna)
Countries Using the Euro (€)
Andorra*
Austria
Belgium
Cyprus
Estonia
Finland
France
Germany
Greece
Ireland
Italy
Kosovo*
Latvia
Lithuania
Luxembourg
Malta
Monaco*
Montenegro*
Netherlands
Portugal
San Marino*
Slovakia
Slovenia
Spain
Vatican City*
* = not a member of the European Union (EU)
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”
-Financial Times
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 (Stability & Growth Pact)
Eurozone Stability and Growth
Pact Breaches, 1999-2009
Luxembourg
Finland
Belgium
Spain
Netherlands
Ireland
Austria
Portugal
Germany
France
Italy
Greece
0
2
4
6
8
10
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 (Stability & Growth Pact)
• 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
Original Euro (€) Conversion Rates
Country
Currency
Conversion Rate
Austria
Schilling
13.7603
Belgium
Franc
40.3399
Finland
Markkas
5.94573
France
Franc
6.55957
Germany
Mark
1.95583
Ireland
Pound
0.787564
Italy
Lira
1936.27
Luxembourg
Franc
40.3399
Netherlands
Guilder
2.20371
Portugal
Escudo
200.482
Spain
Peseta
166.386
Euro vs. USA
[Source: Wall Street Journal, 9/28/98]
Euro-11
USA
Population
290 million
267 million
GDP
$8.2 trillion
$8.6 trillion
% World GDP
19%
20%
% World Trade
19%
17%
Stock Mkt Cap
$3.6 trillion
$9.5 trillion
$ 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)
22 February 2016: $1.1037
Dollar Value of the Euro (€)
Date
$ Value
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
% Change
+17.70%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
1 Jan 2005
$1.3569
+ 7.90%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
1 Jan 2005
$1.3569
+ 7.90%
1 Jan 2006
$1.1842
-12.73%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
1 Jan 2005
$1.3569
+ 7.90%
1 Jan 2006
$1.1842
-12.73%
1 Jan 2007
$1.3203
+11.49%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
1 Jan 2005
$1.3569
+ 7.90%
1 Jan 2006
$1.1842
-12.73%
1 Jan 2007
$1.3203
+11.49%
1 Jan 2008
$1.4704
+11.37%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
1 Jan 2005
$1.3569
+ 7.90%
1 Jan 2006
$1.1842
-12.73%
1 Jan 2007
$1.3203
+11.49%
1 Jan 2008
$1.4704
+11.37%
1 Jan 2009
$1.4043
- 4.49%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
1 Jan 2005
$1.3569
+ 7.90%
1 Jan 2006
$1.1842
-12.73%
1 Jan 2007
$1.3203
+11.49%
1 Jan 2008
$1.4704
+11.37%
1 Jan 2009
$1.4043
- 4.49%
1 Jan 2010
$1.4369
+ 2.32%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
1 Jan 2005
$1.3569
+ 7.90%
1 Jan 2006
$1.1842
-12.73%
1 Jan 2007
$1.3203
+11.49%
1 Jan 2008
$1.4704
+11.37%
1 Jan 2009
$1.4043
- 4.49%
1 Jan 2010
$1.4369
+ 2.32%
1 Jan 2011
$1.3342
- 7.15%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2002
$0.8920
1 Jan 2003
$1.0501
+17.70%
1 Jan 2004
$1.2582
+19.80%
1 Jan 2005
$1.3569
+ 7.90%
1 Jan 2006
$1.1842
-12.73%
1 Jan 2007
$1.3203
+11.49%
1 Jan 2008
$1.4704
+11.37%
1 Jan 2009
$1.4043
- 4.49%
1 Jan 2010
$1.4369
+ 2.32%
1 Jan 2011
$1.3342
- 7.15%
1 Jan 2012
$1.2957
- 2.89%
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2013
$1.3203
+ 1.90%
1 Jan 2014
1 Jan 2015
1 Jan 2016
1 Jan 2017
1 Jan 2018
1 Jan 2019
1 Jan 2020
Dollar Value of the Euro (€)
Date
$ Value
% Change
1 Jan 2013
$1.3203
+ 1.90%
1 Jan 2014
$1.3786
+ 4.42%
1 Jan 2015
$1.2142
-11.92%
1 Jan 2016
$1.0860
-10.56%
1 Jan 2017
1 Jan 2018
1 Jan 2019
1 Jan 2020
Euro (€) versus the U. S. $
[Interbank Rate – 1/1/99 to 2/1/16]
$1.60
$1.50
$1.40
$1.30
$1.20
$1.10
$1.00
$0.90
$0.80
Date
Who Needs Dollars?
• Anyone who wants to …
– buy U. S. goods and services
– invest in U. S. assets
– travel to the U. S.
• Anyone who wants to buy oil!
Why the weak Euro (€)?
Why the strong U. S. Dollar ($)?
1. Stronger U. S. economic growth
2. Shrinking U. S. Government deficit
Why the weak Euro (€)?
Why the strong U. S. Dollar ($)?
1.
2.
3.
Stronger U. S. economic growth
Shrinking U. S. Government deficit
Strong U. S. stock market performance; compound
annual returns for ten years ended -
2001: +13.00%
2002: + 9.34%
2003: +11.07%
2004: +12.07%
2005: + 9.07%
What Changed to Weaken the $?
• Slower U. S. growth
USA Real GDP Growth (%)
[1993 – 2015; Source: bea.gov]
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
What Changed to Weaken the $?
• Slower U. S. growth
• Large U. S. government deficits
U. S. Budget Deficit/Surplus
[1990-2015, $ Billions]
250
0
-250
-500
-750
-1,000
-1,250
-1,500
Source: Congressional Budget Office [www.cbo.gov]
What Changed to Weaken the $?
• Slower U. S. Growth
• Large U. S. Government deficits
• Variable U. S. market returns (S&P 500):
2004: +10.9%
2010: +15.1%
2005: + 4.9%
2011: + 2.1%
2006: +15.8%
2012: +16.0%
2007: + 5.5%
2013: +32.4%
2008: -37.0%
2014: +13.7%
2009: +26.5%
2015: + 1.4%
Annual Returns, S & P 500 Stock Index
[1990 - 2015, Percent (%)]
40
30
20
10
0
-10
-20
-30
-40
Year
What’s Changed to Weaken the Dollar ($)?
1.
2.
3.
Slower U. S. economic growth
Large U. S. Government deficits
Weaker U. S. stock market performance; compound
annual returns for ten years ended -
2006: + 8.35%
2011: + 2.91%
2007: + 5.91%
2012: + 7.09%
2008: - 1.38%
2013: + 7.40%
2009: - 0.95%
2014: + 7.68%
2010: + 0.50%
2015: + 7.30%
Compound Annual Returns, S & P 500
Percent(%)
[Ten-Year periods Ending 2001-15]
14
12
10
8
6
4
2
0
-2
Year
P/E Ratio, S & P 500 Index (TTM)
[Monthly, 1/1/02 – 2/1/16]
70
60
50
40
30
20
10
U. S. Treasury Secretaries
U. S. Treasury Secretaries
• Robert E. Rubin
(1995 – 1999)
• “Strong dollar”
U. S. Treasury Secretaries
• Lawrence H. Summers
(1999 – 2001)
• “Strong dollar”
U. S. Treasury Secretaries
• Paul H. O’Neill
(2001 - 2002)
• “Market decides the
value of the dollar”
U. S. Treasury Secretaries
• John W. Snow
(2003 - 2006)
• “A strong dollar is in
the national interest.”
Political Effect?
• John W. Snow – in testimony (5-18-06)
before the Senate Committee on Banking,
Housing, and Urban Affairs:
• “Let me state at the outset: A strong dollar
is in our nation’s interest, and currency
values should be determined in open and
competitive markets in response to
underlying economic fundamentals.”
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.”
U. S. Treasury Secretaries
• Timothy Geithner
(2009 - 2013)
• “A strong dollar is
very important to this
country, I mean that,
and it’s very important
that people recognize
it.”
Political Effect?
[U. S. Treasury Secretaries]
• Timothy Geithner(2009 - 2013) – “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.”
U. S. Treasury Secretaries
• Jacob J. Lew
(2013 - )
• “A strong dollar has
always been a good
thing for the United
States.”
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 $465bn (€516bn) this
year.”
U. S. Current Account Deficit
[1998-2015, Quarterly, ($ Billions)]
0
-25
-50
-75
-100
-125
-150
-175
-200
-225
-250
Achilles Heel?
[Financial Times, May 31, 2002]
• This means the US needs to attract
$1.3bn in overseas funds every day
to prevent the dollar from falling.”
U. S. Avg. Monthly Net Capital Inflow
($Billions, 2001-2002)
44
14.6
2001
2002
Year
Financial Times , Friday, May 31, 2002
Where Do We Go From Here?
• “Dollar slips to all-time low ($1.3667) vs.
Euro”
– Associated Press
– December 31, 2004
• “Bears are betting on a decline in the
dollar.”
– Barron’s
– August 21, 2006
Foreign Trade (-) and Capital Flows (+)
[2005-2015; $ Billions]
80
70
60
50
40
30
20
10
0
Foreign Trade (-) and Capital Flows (+)
[2005-2015; $ Billions]
175
150
125
100
75
50
25
0
-25
-50
-75
Trade
Capital
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., 2004-2015
6,500
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
Increase of
$4.6 Trillion
Chinese Holdings of U. S.
Treasury Securities, $Bils., 2004-15
1,300
1,100
900
700
500
300
100
Japanese Holdings of U. S.
Treasury Securities, $Bils. 2004-15
1,300
1,200
1,100
1,000
900
800
700
600
500
“Oil Exporters” Holdings of U. S.
Treasury Securities, $Bils., 2005-15
325
300
275
250
225
200
175
150
125
100
75
50
OPEC = Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar,
Saudi Arabia, UAE, Algeria, Gabon, Libya, and Nigeria
Top Ten Foreign Holders of U. S. Treasury
Securities, $Billions – December 2015
1,400
1,200
1,000
800
600
400
200
0
Russian Holdings of U. S. Treasury Securities,
$Billions, March 2013 – December 2015
175
150
125
100
75
50
25
0
Impact of a Stronger U. S. Dollar
[Advantages]
1. Foreign goods less expensive
2. Foreign investment less
expensive
3. Foreign travel less expensive
4. U. S. interest rates – lower; more
foreign capital
Impact of a Stronger U. S. Dollar
[Disadvantages]
1. American products are less
competitive abroad; decreased
exports; larger U. S. trade deficit
2. U. S. A. manufacturing sector less
competitive
3. Decreased return on U. S.
overseas investments
Return on Overseas Investments
$ Value of the
Euro (€)
Euros
Earned
Dollar
Equivalent
$1.28
($1 / €0.781)
€ 1,000,000
$1,280,000
Return on Overseas Investments
$ Value of the
Euro (€)
Euros
Earned
Dollar
Equivalent
$1.28
($1 / €0.781)
€ 1,000,000
$1,280,000
$1.00
($1 / €1.000)
€ 1,000,000
$1,000,000
Return on Overseas Investments
$ Value of the
Euro (€)
Euros
Earned
Dollar
Equivalent
$1.28
($1 / €0.781)
€ 1,000,000
$1,280,000
€ 1,000,000
$1,000,000
€ 1,000,000
$950,000
$1.00
($1 / €1.000)
$0.95
($1 / €1.053)
Where Do We Go From Here?
• “OFF THE CHARTS; Dollar Sinks the Lowest
Since It Started to Float”
– The New York Times
– September 22, 2007
• “Fear of European Slump As Currency Sets
Record”
– The New York Times
– September 22, 2007
Where Do We Go From Here?
• “As Dollars Pile Up, Uneasy Traders Lower
the Currency’s Value”
– The New York Times
– May 23, 2009
Where Do We Go From Here?
• “Time for Draghi to open the sluice”
– Financial Tmes
– May, 2014
• “Yen Is Rising, Undermining Japanese
Efforts to Enliven A Listless Economy.”
– The New York Times
– February 16, 2016