Dollar and euro

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Dollar and euro

  1. 1. Dollar & Euro by Alberto Pino
  2. 2. Dollar History <ul><li>The dollar was chosen to become the monetary unit for the USA in 1785. The Coinage Act of 1792 helped put together an organised monetary system that introduced coinage in gold, silver, and copper. Paper notes or greenbacks were introduced into the system in 1861 to help finance the Civil War. The paper notes used several different techniques including a Treasury seal and engraved signatures to help diminish counterfeiting. In 1863, Congress put together the national banking system that granted the US Treasury permission to oversee the issuance of National Bank notes. This gave national banks the power to distribute money and to purchase US bonds more easily whilst still being regulated. </li></ul><ul><li>The Federal Reserve Act of 1913 created one central bank and organised a national banking system that could keep up with the changing financial needs of the country. The Federal Reserve Board created a new currency called the Federal Reserve Note. The first federal note was issued in the form of a ten dollar bill in 1914. Finally, a decision by the Federal Reserve board was made to lower the manufacturing costs of the currency by reducing the actual size of the notes by 30%. The same designs were also printed on all dominations instead of individual designs. </li></ul><ul><li>The designs of the notes would not be changed again until 1996 when a series of improvements were carried out over a ten-year period to prevent counterfeiting. </li></ul>
  3. 3. Value <ul><li>The U.S. dollar is most easily measured by its exchange rate , which compares its value to other currencies. For example, on March 3, 2008, a Euro was worth $1.58. The dollar has declined in 40% value in the last six years, when a Euro was only worth 87 cents </li></ul>
  4. 4. Exchange rates change every day because currencies are traded on an open market. The demand for the dollar has declined against the Euro for many reasons: <ul><li>Interest rates in the U.S. are declining rapidly while those in Europe are declining more gradually. </li></ul><ul><li>Fear of recession in the U.S. means investors are looking for non-dollar denominated investments. </li></ul><ul><li>As more countries join or trade with the EU, demand for the Euro increases. </li></ul><ul><li>As the dollar declines, investors are less likely to hold assets in dollars until the decline stops. </li></ul><ul><li>Many investors are concerned that the large U.S. debt and current account deficit means the U.S. may let the dollar decline so the relative value of its debt is less. </li></ul>
  5. 5. Exchange rates Source: Last 4 years 2005-2002 2003-2000 1996-1999 10.928 10.906 10.894 11.290 10.793 9.663 9.337 9.459 9.553 Mexican peso 1.0734 1.1340 1.2115 1.3017 1.4008 1.5704 1.5487 1.4855 1.4858 Canadian dollar 1.421 1.5882 1.6738 1.6902 1.7429 1.7908 1.7930 1.7361 1.6951 Singapore Dollar 7.6058 7.9723 8.1936 8.2768 8.2772 8.2771 8.2770 8.2784 8.2781 Renminbi 0.4995 0.5425 0.5493 0.5456 0.6117 0.6656 0.6946 0.6598 0.6184 Pound sterling 117.76 116.31 110.11 108.15 115.94 125.22 121.57 107.80 113.73 Japanese yen 0.7293 0.7960 0.8033 0.8040 0.8833 1.0578 1.1171 1.0832 0.9387 Euro 2007 2006 2005 2004 2003 2002 2001 2000 1999 Currency units per U.S. dollar, averaged over the year. [32]
  6. 6. The Dollar as the Major International Reserve Currency <ul><li>The dollar is the most important international reserve currency , followed by the euro . The euro inherited this status from the German mark , and since its introduction, has increased its standing considerably, mostly at the expense of the dollar. Despite the dollar's recent losses to the euro, it is still by far the major international reserve currency, with an accumulation more than double that of the euro. </li></ul><ul><li>In August 2007, two scholars affiliated with the government of the People's Republic of China threatened to sell its substantial reserves in American dollars in response to pressure that they exercise fair trade . [23] The Chinese government denied that selling dollar-denominated assets would be an official policy in the foreseeable future. </li></ul><ul><li>Former Federal Reserve Chairman Alan Greenspan said in September 2007 that the euro could replace the U.S. dollar as the world's primary reserve currency. It is &quot;absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency.&quot; [24] </li></ul>
  7. 7. Percentage of Global currency
  8. 8. Euro <ul><li>1957 – The  Treaty of Rome  was signed, creating the European Atomic Energy Community (EURATOM) and the European Economic Community (EEC). The objective of the Member States was to remove trade and tariff barriers between them and to form a common market. </li></ul><ul><li>  </li></ul><ul><li>1979 – The governments and central banks of the nine Member States ( Belgium, Denmark, France, Ireland, Italy, Luxembourg, the Netherlands, the United Kingdom, West Germany ) created the European Monetary System (EMS) which had the main goal – to create a common currency. </li></ul><ul><li>1988 – The European Council, that is the Heads of State and Governments, confirmed the objective of realising Economic and Monetary Union (EMU). A committee of experts, chaired by the then President of the European Commission, Jacques Delors, examined ways of achieving EMU. Its report (the Delors Report) proposed a transition in three stages. </li></ul><ul><li>1992 – Representatives of twelve European Union (EU) Member States signed the Treaty on European Union (Maastricht Treaty) that provided for the establishment of a single EU currency and the founding of the European Central Bank. </li></ul>
  9. 9. <ul><li>December 1995 – The European Council decided to adopt the euro as the name of the future single currency of the EU (the Lithuanian form in unofficial documents is euras ). The official graphic symbol of the euro € is derived from the Greek letter epsilon , denoting the first letter of the word Europe. The symbol is crossed with two horizontal lines, symbolizing stability in the euro area. The alphabetic code for the euro is EUR, while the digital code is 978. </li></ul>
  10. 10. Exchange Rates <ul><li>The ECB (European Central Bank)targets interest rates rather than exchange rates and in general does not intervene on the foreign exchange rate markets, because of the implications of the Mundell - Fleming Model which suggest that a central bank cannot maintain interest rate and exchange rate targets simultaneously because increasing the money supply results in a depreciation of the currency. </li></ul><ul><li>In the years following the Single European Act , the EU has liberalised its capital markets, and as the ECB has chosen monetary autonomy, the exchange rate regime of the euro is flexible, or floating . This explains why the exchange rate of the euro vis-à-vis other currencies is characterised by strong fluctuations. Most notable are the fluctuations of the euro versus the U.S. dollar, another free-floating currency. However this focus on the dollar-euro parity is partly subjective. </li></ul>
  11. 11. <ul><li>It is taken as a reference because the euro competes with the dollar's role as reserve currency. The effect of this selective reference is misleading, as it gives observers the impression that a rise in the value of the euro versus the dollar is the effect of increased global strength of the euro, while it may be the effect of an intrinsic weakening of the dollar itself </li></ul>
  12. 12. <ul><li>An interest rate reduction by the Federal Reserve on September 18 , 2007 , raised the euro's value significantly and caused the dollar to fall below €0.70 one month later, to new record lows. </li></ul><ul><li>Economists like Alan Greenspan suggest that another reason for the continued fall of the dollar is its decreasing role as the world's reserve currency. Jim Rogers declared that he thinks the dollar's value will fall even further, especially against the Chinese yuan . Chinese officials signaled plans to diversify the nation's $1.43 trillion reserve in response to a falling U.S. currency which also set the dollar under pressure. The dollar sank to new lows against the euro in the days following 4 March 2008 , following a series of dour reports on the U.S . economy and expectations that the Federal Reserve will continue slashing interest rates. </li></ul>
  13. 14. Dollar vs. Euro <ul><li>Not long after the introduction of the euro as a cash currency in 2002, the dollar began to depreciate steadily in value. As U.S. trade and budget deficits continued to increase, the euro started rising in value. </li></ul><ul><li>By December 2004, the dollar had fallen to new lows against all major currencies; the euro rose above $1.36/€ (under €0.74/$) for the first time, in contrast to previous lows in early 2003 (€0.87/$). </li></ul><ul><li>In the first quarter of 2004 the U.S. dollar, with the advantage of Federal Reserve's policy of raising the interest rates , regained some standing against all major currencies, climbing from €0.78/$ to €0.84/$. However, all gains were lost in the second half of 2004, and the dollar stood at €0.74/$ at the end of 2004. </li></ul><ul><li>Since 2002, the only year in which the dollar actually recovered against the euro was 2005. Although some analysts previewed the dollar dropping as far as $1.60/€ (€0.63/$), it finished 2005 with an increase against the euro, climbing to €0.83/$. </li></ul>

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