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

3. 1-1-1999
Austria (€)
Belgium (€)
Denmark (ERM II)
Finland (€)
France (€)
Germany (€)
Great Britain (£)
Ireland (€)
Italy (€)
Luxembourg (€)
Netherlands (€)
Portugal (€)
Spain (€)
Sweden (SKr)

4. 1-1-1999 1-1-2001
Austria (€) Greece (€)
Belgium (€)
Denmark (ERM II)
Finland (€)
France (€)
Germany (€)
Great Britain (£)
Ireland (€)
Italy (€)
Luxembourg (€)
Netherlands (€)
Portugal (€)
Spain (€)
Sweden (SKr)

5. 1-1-1999 1-1-2001 5-1-2004
Austria (€) Greece (€) Cyprus (€) [1/08]
Belgium (€) Czech Rep.
Denmark (ERM II) Estonia (€) [1/11]
Finland (€) Hungary
France (€) Latvia
Germany (€) Lithuania (ERM II)
Great Britain (£) Malta (€) [1/08]
Ireland (€) Poland
Italy (€) Slovakia (€) [1/09]
Luxembourg (€) Slovenia (€) [1/07]
Netherlands (€)
Portugal (€)
Spain (€)
Sweden (SKr)

6. 1-1-1999 1-1-2001 5-1-2004
Austria (€) Greece (€) Cyprus (€) [1/08]
Belgium (€) Czech Rep.
Denmark (ERM II) Estonia (€) [1/11]
Finland (€) Hungary
France (€) Latvia
Germany (€) Lithuania (ERM II)
Great Britain (£) Malta (€) [1/08]
Ireland (€) Poland
Italy (€) Slovakia (€) [1/09]
Luxembourg (€) Slovenia (€) [1/07]
Netherlands (€)
Portugal (€) 1/1/2007
Spain (€) Bulgaria
Sweden (SKr) Romania

7. 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

8. 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

9. 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”)

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

11. 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)

12. Eurozone Stability and Growth
Pact Breaches, 1999-2009

13. 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

14. 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

15. 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

16. $ 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

17. $ 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)
• 23 May 2012: $1.2599

18. Dollar Value of the Euro (€)
Date $ Value % Change
1 Jan 2002 $0.8920
1 Jan 2003 $1.0501 +17.70%

19. 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%

20. 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%

21. 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%

22. 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%

23. 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%

24. 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%

25. 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%

26. 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%

27. 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%

28. Euro (€) versus the U. S. $
[Interbank Rate – 1/1/99 to 5/1/12]

29. 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!

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

31. Why the weak Euro (€)?
Why the strong U. S. Dollar ($)?
1. Stronger U. S. economic growth
2. Shrinking U. S. Government deficit
3. 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%

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

33. U. S. A. GDP Growth (%), 1993 - 2012

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

35. U. S. Budget Deficit/Surplus
[1990-2012, $ Billions]

36. What’s Changed to Weaken the $?
• Slower U. S. Growth
• Large U. S. Government deficits
• Weaker U. S. market returns (S&P 500):
2000: - 9.1% 2006: +15.8%
2001: - 11.9% 2007: + 5.5%
2002: - 22.1% 2008: - 37.0%
2003: +28.7% 2009: +26.5%
2004: +10.9% 2010: +15.1%
2005: + 4.9% 2011: + 2.1%

38. What’s Changed to Weaken the Dollar ($)?
1. Slower U. S. economic growth
2. Large U. S. Government deficits
3. Weaker U. S. stock market performance; compound
annual returns for ten years ended -
2002: + 9.34% 2007: + 5.91%
2003: +11.07% 2008: - 1.38%
2004: +12.07% 2009: - 0.95%
2005: + 9.07% 2010: + 0.50%
2006: + 8.35% 2011: + 2.91%

39. Compound Annual Returns, S & P 500
[Ten-Year periods Ending 2001-11]

40. P/E Ratio, S & P 500 Index (TTM)
[Monthly, 1/1/02 – 6/1/12]

41. 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.”

42. Political Effect?
[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.”

43. 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.”

44. 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.”

45. U. S. Current Account Deficit
[1998-2012, Quarterly, ($ Billions)]

46. 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.”

47. U. S. Avg. Monthly Net Capital Inflow
($Billions, 2001-2002)
44
14.6
2001 2002
Year
Financial Times, Friday, May 31, 2002

48. 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

49. Foreign Trade (-) and Capital Flows (+)
[2005-2012; $ Billions]

50. Foreign Trade (-) and Capital Flows (+)
[2005-2012; $ Billions]

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

52. Total Foreign Holdings of U. S.
Treasury Securities, $Bils., 2005-12
Increase of
$3.2 Trillion

53. Chinese Holdings of U. S. Treasury
Securities, $Bils., 2005-12

54. Japanese Holdings of U. S. Treasury
Securities, $Bils. 2005-12

55. “Oil Exporters” Holdings of U. S.
Treasury Securities, $Bils., 2005-12

56. Top Ten Foreign Holders of U. S. Treasury
Securities, $Billions., - March 2012

57. Concerns About the US Economy?
1. Corporate governance and accounting
standards (Enron; WorldCom;
Countrywide Mortgage)
2. Productivity gains have not translated
into higher corporate profitability
3. Surge in government spending
…could depress economic growth

58. Impact of a Weaker U. S. Dollar
[Disadvantages]
1. Foreign goods more expensive
2. Foreign investment more
expensive
3. Foreign travel more expensive
4. U. S. interest rates – higher; less
foreign capital

59. Impact of a Weaker U. S. Dollar
[Advantages]
1. American products are more
competitive abroad; increased
exports; lower U. S. trade deficit
2. U. S. A. manufacturing sector
more competitive
3. Increased return on U. S. overseas
investments

60. Return on Overseas Investments
$ Value of the Euros Dollar
Euro (€) Earned Equivalent
$0.95
€ 1,000,000 $950,000
($1 / €1.053)

61. Return on Overseas Investments
$ Value of the Euros Dollar
Euro (€) Earned Equivalent
$0.95
€ 1,000,000 $950,000
($1 / €1.053)
$1.00
€ 1,000,000 $1,000,000
($1 / €1.000)

62. Return on Overseas Investments
$ Value of the Euros Dollar
Euro (€) Earned Equivalent
$0.95
€ 1,000,000 $950,000
($1 / €1.053)
$1.00
€ 1,000,000 $1,000,000
($1 / €1.000)
$1.35
€ 1,000,000 $1,350,000
($1 / €0.74)

63. 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

64. Where Do We Go From Here?
• “As Dollars Pile Up, Uneasy Traders Lower
the Currency’s Value”
– The New York Times
– May 23, 2009