Forecasting of US Dollar value in next 5 years (2022)

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"FAIR VALUE OF US DOLLAR IN NEXT 5 YEARS.”
A PROJECT REPORT
Submitted by ;
YASH TEJAS DAVE
ROLL NO. : 617149
For partial fulfillment for the award of the degree of
BACHELOR OF COMMERCE (B.COM) HONOURS
DEPARTMENT OF ACCOUNTING & FINANCIAL MANAGEMENT
FACULTY OF COMMERCE
THE M.S. UNIVERSITY OF BARODA
VADODARA
MAY 2017
RESEARCH GUIDE
Mr. URJIT PANDYA

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Index
Sr. No Particulars Page No.
1. Introduction 03-08
2. Literature reviews
(a) Are Countries Moving Away from the USD? (Published by
:Australian Journal of Basic and Applied Sciences )
09-10
(b) The US Dollar and its status as the reserve currency – an
analysis (Sam Houston State University)
11-14
3. Research design 15-24
4. Source Of Information 25
5. Research Instruments 26
6. Data Interpretation & Analysis
 US Trade deficit data
 Tax rates
 Relation of USD with 5 major pegged currency
 Money Supply
 Interest rates
 Government holding of USD currency other than USA
 US corporate/Govt. bond yield (10 Years)
 US National debt
 Global Currency Weights
27-36
7. Significance of this research study
a. Currency Market
b. Commodity Market
c. Bond Market
d. Equity Market
37-38
8. Conclusion 39-40
9. Limitations of this research 41
10. Bonafide Certificate 42
11. Certificate of Originality 43
12. Acknowledgement 44

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"The U.S. dollar is getting too strong” - Donald Trump
Pounds hits fresh six-week high against euro, as dollar recovers after Trump warns currency is
'getting too strong' - 'The Telegraph' reported.
1. INTRODUCTION
The United States has enjoyed its place as the center of the financial world for over seventy years
through use of the dollar as the world’s most common reserve currency. The dollar’s placement
in this role in the financial world was effectively established through the Bretton Woods
agreement in 1944 and then solidified by way of Nixon’s de-pegging of the dollar from the gold
standard in 1971. The financial system that worked so well for the halfcentury after World War
II ended, however, has seen some major complications that are causing some to look for a
change from the dollar-denominated reserve currency system. According to Barry Eichengreen
in 2009, the United States has taken advantage of the benefits of owning the global reserve
currency, namely that of being able to finance a current account deficit as a result of having
captive buyers of dollars on the world market. This has allowed accumulation of large trade
deficits and the country has a sizable and ever-increasing federal deficit. Additionally, the United
States is printing large amounts of money in an attempt to stimulate an underperforming
economy, resulting in inflation that decreases the value of dollars held by foreign nations. With
the dollar’s reduced value and increasing uncertainty surrounding future manipulations of the
currency, there is a potential opening for other currencies to make a play to become a reserve
currency and thus gain their countries or regions the economic advantages currently enjoyed by
the United States as a result. Some look to the Euro as a possible alternative to the dollar. Steady
increase in usage of the Euro as a reserve currency, combined with what appeared to a
strengthening value in the Euro compared to the dollar, made the case for having the Euro
become a new reserve currency look plausible. While this case can still be made, some of the
trends benefitting this position have leveled off or reversed. These trends, in addition the
European Union’s own political uncertainty, must be examined in light of considering any
additional usage of the Euro as a reserve currency or using the Euro as the dominant global
reserve currency. Others are looking to the Chinese Reminbi, or Yuan, as a possible contender
for usurping the dollar’s global reserve status. China’s booming economy over the last decade
has threatened to dwarf that of the United States in the last decade, leading to the extrapolation
that perhaps the potential new holder of the title of the world’s largest economy should also be
the holder of the world’s reserve currency. New weakness in this fast-growing economy,
however, may potentially undermine this theory, as may ever present issues with Chinese
currency such as a lack of availability to foreign holders that are essential values for a global
reserve currency. A third potential option for a change in global reserve currencies does not
involve a de facto currency at all. Some see the International Monetary Fund’s Special Drawing
Rights (SDR or XDR) unit as a superior currency unit compared to other options. Some firms
already use the SDR as the unit of value, and a few countries already peg their value to the SDR.
The ‘basket’ of currencies that make up the SDR does have advantages compared to de facto
currencies like the dollar, such as reduced exchange volatility, but the unit would have issues that
must be addressed in order to be considered as a reserve currency itself instead of a simple

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composite of such currencies. This paper will look into the strength and stability of the dollar as
a reserve currency as well as the global financial environment in which it exists. Alternative
currencies will be individually examined in terms of their projected place as a reserve currency
in foreign holdings and the feasibility that each could surpass the dollar and become the premier
reserve currency. These examinations will help create a projection for how the environment for
reserve currency holdings will change going forward.
What Is United States Dollar ?
The United States dollar (sign: $; code: USD; also abbreviated US$ and referred to as the dollar,
U.S. dollar, or American dollar) is the official currency of the United States and its insular
territories per the United States Constitution.
What is the dollar index?
The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of
a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is
similar to other trade-weighted indexes, which also use the exchange rates from the same major
currencies.

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Currently, this index is calculated by factoring in the exchange rates of six major world
currencies the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss
franc. The euro holds the most weight versus the dollar in the index, constituting about 58% of
the weighting followed by the yen with about 14%. The index started in 1973 with a base of 100,
and values since then are relative to this base.

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Calculating U.S. Dollar Index Movements
An index value of 120 suggests that the U.S. dollar has appreciated 20% versus the basket of
currencies over the time period in question. Subtracting the initial value of 100 from the current
value of 120 yields 20; dividing the difference by the initial value of 100 gives an appreciation of
20%. Similarly, if the index is currently 80, falling -20 from its initial value, then the same
calculation would give a depreciation of 20%. The appreciation and depreciation results are a
factor of the time period in question.
History of the U.S. Dollar Index
The U.S. dollar index has risen and fallen sharply throughout its history, reaching its high point
in February 1985 with a value of 164.72 and its low point in March 2008 with a value of 70.698.
As of June, 2016, the index carried a value of 93.67, meaning that the U.S. dollar has depreciated
versus the basket of currencies since the index started in 1973. The index is greatly affected by
macroeconomic factors, including inflation/deflation in the dollar and foreign currencies
included in the comparable basket as well as recessions and economic growth in those countries.
The euro replaced many European currencies previously in the index in 1999 such as Germany's
predecessor currency to the euro: the Deutsche Mark. In the coming years, it is likely currencies
will be replaced as the index strives to represent major U.S. trading partners. It is likely in the
future that currencies such as the Chinese yuan and Mexican peso will supplant other currencies
in the index due to China and Mexico being major trading partners with the United States.
Why the Dollar Is the Global Currency
A world or global currency is one that is accepted for all trade throughout the world. Some of the
world's currencies -- the U.S. dollar, the euro and the yen -- are accepted for most international
transactions. Of these, by far, the U.S. dollar is the most widely used. That's not an official global
currency. In fact, the world has 185 currencies.Most of these currencies are only used inside their
own countries. Any one of them could theoretically replace the dollar as the world's currency.
But they probably won't for a wide variety of reasons.

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How global trade and commerce is interlinked with this global reserve currency
The relative strength of the U.S. economy means that its currency, the dollar, is the most
powerful in the world. Around $580 billion in U.S. bills were being used outside the country.
That's 65% of all dollar-denominated bills, including 75% of $100 bills, 55% of $50 bills, and
60% of $20 bills. Most of these bills are being used in the former Soviet Union countries and in
Latin America.
Cash is just one indication of the role of the dollar as a world currency. More than one-third of
the world's output, as measured by Gross Domestic Product, comes from countries that have
pegged their currencies to the dollar. That includes seven countries that have adopted the dollar
and 89 that keep their currency in a tight trading range relative to the dollar.
In the foreign exchange market, the dollar rules. More than 85% of forex trading involves the
U.S. dollar. Furthermore, 39% of the world's debt is issued in dollars. As a result, foreign banks
require a lot of dollars to conduct business. For example, during the 2008 financial crisis, non-
U.S. banks had $27 trillion in international liabilities denominated in foreign currencies.
Of that, $18 trillion was in dollars. That's why the U.S. Federal Reserve boosted its dollar swap
line -- to keep the world's banks from running out of dollars. (Source: "Is the Role of the Dollar
Changing?" The Federal Reserve Bank of New York, January 2010.)
Another indication is how willing governments are to hold the dollar in their foreign exchange
reserves. Governments acquire currencies from their international transactions, or from domestic
businesses and travelers who redeem them for local currencies. In addition, some governments
purchase foreign currencies as an investment of their reserves. Others, such as China and Japan,
deliberately buy foreign currencies of countries they export to so that their own currencies are
cheaper in comparison. In the second quarter of 2016, 63.4% of the world's known reserves were
held in dollars. (Source: "COFER Tables," International Monetary Fund.)
Why the Dollar Is the Highest Currency in the World
The dollar became the highest currency in the world thanks to the 1944 Bretton Woods
agreement. Before then, most countries were on the gold standard. Their governments promised
to redeem their currencies for their value in gold upon demand. The world's developed countries
met at Bretton Woods, New Hampshire, to peg the rate of exchange for all foreign currencies to
the U.S. dollar.
At that time, the dollar was backed by its value in gold, and the United States held the largest
gold reserves. This allowed other countries to back their currencies with dollars, rather than gold.
By the early 1970s, countries began demanding gold for the dollars they held to combat inflation.
Rather than allow Fort Knox to be depleted of all gold reserves, President Nixon untied the
dollar to gold. By that time, the dollar had already become the world's dominant reserve
currency. For more, see stagflation.
The next closest reserve currency is the euro. Only 31.8% of known central bank foreign
currency reserves were in euros as of the second quarter 2016. The chance of the euro becoming

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a world currency increase as the eurozone crisis fades. Nevertheless, the difficulties of having a
world currency shared by different countries is highlighted by the eurozone struggles.
(Source: "COFER Tables," International Monetary Fund.)

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2. Literature Reviews
A. Andrew House, Balasundram Maniam, Hadley Leavell, Are Countries Moving
Away from the USD? (Published by :Australian Journal of Basic and Applied
Sciences )
The past, present, and future of the dollar as a global reserve currency:
A brief sampling reveals that many economists are lending their voices to the debate on the
future of the dollar as a reserve currency. Still is important to evaluate independent data.
Constructed with data from the IMF, Figure 1 shows the reserve currency of choice for allocated
reserves across the world for the past twenty years. For the time period prior to the creation of
the euro, the component currencies of Europe are summed.
Fig. 1: Dollar and euro proportions of global allocated reserves (IMF2014).
The data from the IMF reveal that the dollar’s overall position as a reserve is not significantly
different from the mid 1990’s. The recent trend is just a rebalancing as reserves moved away
from the euro based on uncertainty in the new currency. Once
the currency was established, reserves balanced back to where they were prior to the euro’s
creation.

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Summary and conclusion(LR 1):
Based on current indications, the dollar’s current position as a reserve currency is secure for the
near term. Unfortunately this is not necessarily a logical conclusion for the long term. Without
policy changes the dollar should not remain atop the reserve landscape.A lack of viable
alternatives has prevented a shift up to this point. Due to the US’srecent fiscal policies, a decline
is much more likely than it was ten years ago. The rise of a viable alternative like the renminbi
could somewhat rapidly result in the decline of the dollar. A decline in the status of the dollar as
the reserve currency of choice could make it very difficult for the United States to continue
forward with its current global influence. By losing this position, the US would be forced to be
less unilateral and more fiscally responsible. A decline could also jeopardize the US defense
position and by relation, the defense position of US allies who rely on its military influence. It
may not be hyperbole to agree with many who worry the entire financial security of the world
would be put at risk by the fall of the dollar. Given these rather stark consequences and the
current void in competing currencies, the United States can take advantage and improve
monetary policies now to avoid a potentially disastrous change in the future. The best way to
stabilize the dollar is by adopting a tighter monetary policy. The Federal Reserve cannot afford
to keep interest rates so low for so long. The Federal government must pursue sound budgetary
policies based on a balance of spending cuts and tax increases. The American people must also
be willing to endure the costs of balancing the trade deficit. Without making some of these
changes, the US dollar as a reserve currency will lose its favorable position and the people of the
United States and world at large will experience a considerable negative impact.

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B. Literature Review II (THE US DOLLAR AND ITS STATUS AS A RESERVE
CURRENCY – AN ANALYSIS
1BALASUNDRAM MANIAM, 2KEVIN STEWART, 3HADLEY LEAVELL
Sam Houston State University )
A LOOK TO THE FUTURE
According to Leong and Nag in 2016, it appears the dollar will keep its role as the world’s
premier reserve currency going forward, as it still accounts for 64.06% of allocated reserves as of
March 31. In comparison, holdings for the euro dropped for the eighth consecutive quarter to a
level of 19.91%, a steep drop from its high point of 28% of holdings in 2009. It appears that the
dollar does not have as much strength behind it in the form of the United States economy as
much as it did in the past. However, in this period of increased global uncertainty and currency
valuation changes, countries still want their portfolios to be centered around the security of the
dollar. In the viewpoint of the author, the most likely scenario for the financial world includes a
continuation of the dollar as the world’s reserve currency. This viewpoint largely holds upon
Eun’s theory of inertia from 2009 with respect to currencies and commodity pricing- that the
dollar’s history of being the primary denomination of currencies over the last seventy years
would give the currency incumbency status going forward, making it difficult for a rival to come
forward and dethrone it. If one projects a sustained period of economic stability going forward, it
would follow that there would not be a great change in relative value between currencies
commonly used in reserves (dollar, euro, RMB, pound sterling, yen). As a result of this
inactivity, relative use of reserve currencies should be maintained with respect to each other,
resulting in the dollar maintaining its position and competitive advantage as the premier reserve
currency. (This scenario would also result in mostly unchanged allocations for currency
proportions within Special Drawing Rights at the next re-valuation period.) However, it is this
author’s position that relative economic stability will not be maintained within the short term
(defining that “short term” as the period between the present day and the next re-valuation of
SDR scheduled for 2020). Several of the currencies used to value SDR has a potential “chaos
scenario” approaching in the near future. The Japanese Yen and Pound Sterling of Great Britain
are not competitors for the title of premier reserve currency, but these currencies are still widely
held as foreign reserves; thus, changes in the value and stability of these currencies can affect the
relative
holdings of the dollar. The Japanese Yen had an argument for premier reserve status in the
1980s, according to Cohen in 2009, but has now become an “also-ran” and has been steadily
devalued over the last few years. This trend has trend has halted more recently, though, with
Japanese officials agreeing to abide by G7 and G20 exchange rate agreements. This abiding to
the exchange rate agreements has resulted in a stronger Yen, which has slowed Japanese exports
and, by extension, the Japanese economy. One wonders how long Japan will continue to respect
currency agreements in the face of a declining Japanese stock market. A likely scenario sees

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Japan breaking the agreements and going back to currency devaluation in order to restore the
Japanese market (returning to the “devil you know”, if you will). This restoration of the stock
market would have the side effect of loss of currency stability in the eyes of the international
community by virtue of breaking the currency agreements. The loss of stability, combined with
the devaluation itself, would make the Yen less attractive as a reserve currency. One would
project a reduction of usage of Yen as reserve currency in the short term under this probable
scenario, and with that, a potential increase in dollar holdings as foreign holders of Yen switch to
dollars. (With regards to SDR, the Yen has been losing influence since the year 2000, when it
made up 18% of an SDR’s weight. Today, Yen only makes up 8.33% of an SDR; under this
probable ‘chaos scenario’, that percentage could drop even further.) The pound sterling of Great
Britain faces great uncertainty going forward as a reserve currency as a result of possibly exiting
the European Union (known commonly as “Brexit”). Such a move would be cause for great
economic shakeup, with 52% of British trade coming with EU countries. With Brexit likely
having a negative impact with respect to European trade, combined with the uncertainty resulting
from an unprecedented political upheaval, the pound sterling faces probable loss of value and
near-certain loss of perceived stability. Both of these phenomenon would likely result in reduced
attractiveness as a reserve currency in the short term, should Brexit be passed, and should result
in greater holdings of dollars as a result of pound sterling holders switching to the more stable
dollar. The Chinese RMB will continue to struggle as the country continues to fight an internal
struggle between transparency and allowing the currency to float and achieve its “true” value,
necessary conditions that must be maintained for the RMB to remain on the world stage as part
of SDR, and protectionism and devaluing the currency for purposes of maintaining stability in
China’s economy. A probable view holds that reinstitution of capital controls and continued
usage of state-declared devaluation of RMB will result in an increasingly dim view of the
currency by the IMF, resulting in the reduction of RMB’s role in the SDR in 2020. (One could
see this resulting in the euro and pound sterling regaining their influence with respect to the
value of an SDR that was lost in 2015 when the RMB was first included in the SDR calculation).
Beyond this, there exists the potential for further chaos resulting from Chinese currency
outflows. China has, so far, been mitigating some of the effects of its economic slowdown
through the selling of its own reserves to combat currency outflows. These reserves are finite,
though, and may be burned out in the short term if currency outflows continue at current or at
increased rates. Such a situation would dictate that China devalue its currency to a much greater
degree than it currently does on a daily basis. This devaluation would spook holders of RMB as a
reserve currency, likely reducing RMB holdings worldwide. This should result in some reserve
holdings being transferred from RMB back into the more stable dollar. It appears that the Euro
does not have a near-term chaos scenario. Brexit, in and of itself, would not affect the Eurozone
as much as it would the United Kingdom in terms of loss of trade and decreased stability. With
that said, should a Brexit occur, it would mean that other members of the Eurozone would leave
as well should EU membership prove to have declining benefits compared to re-established
autonomy in the future. As such, the Euro could see increased usage as a reserve currency going
forward in the short term as a result of relative stability compared to the Yen, pound sterling, and
RMB, but these gains would be somewhat mitigated by a newly established long-term threat of
more EU countries leaving the Eurozone. It is possible, but not yet probable, that certain

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countries suffering in the wake of the migration crisis may look to re-establish autonomy by
looking to leave the EU, and by extension, the Eurozone. An unstable EU membership creates a
less stable euro, and with the dollar becoming more stable by comparison, foreign holdings will
continue to move towards the dollar. The dollar should maintain its relative position as a reserve
currency on the basis of the above issues of its rival reserve currencies. This is not to say the
dollar will enjoy stability in and of itself. Lack of stability in the U.S. stock market dictates that
an economic slowdown may allow for the return of dollar devaluation through quantitative
easing, reducing value and stability for foreign holders of dollars. Additionally, there is the threat
of reduced economic stability through the election of a populist U.S. president in 2016, one
whose economic strategy appears largely unknown. That said, even if the dollar does suffer from
a reduction in stability, it would likely result in increased foreign holdings of dollars. This is
based upon the value of incumbency, demonstrated previously by the financial crisis of 2008,
when the U.S. economy showed great instability but foreign holdings of dollars actually went up.
In summation, in the near future, there is potential for instability and loss of value amongst all
major reserve currencies. Should this potential dissipate, the dollar should maintain its position
by virtue of its current standing as the premier reserve currency. However, if there is instability
in global markets and loss of value for one or multiple reserve currencies, the dollar will
maintain its hold as the top reserve currency by means of its incumbency to the position and
global inertia with respect to commodities pricing, with holdings of dollars likely increasing in
such a scenario, even if the instability and loss of value occurs within the dollar itself.

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CONCLUSION OF LITERATURE REVIEW II
The United States has been in place as the world’s reserve currency for over seventy years. The
makeup of the world economy has changed over that period. Dominance of the U.S. economy
has given way to strong rivals in the form of Europe and China, and with them come the
possibility of their respective currencies vying for the benefits of being reserve currencies. Some
look to Special Drawing Rights as a way to improve on the system as a whole. Each currency
that has emerged has found to have flaws- the dollar with its increasing capital outflows, the euro
with inability to create a cohesive strategy to satisfy a divided region, and the RMB with the
struggle between liberation of the currency and maintained Chinese control. SDRs have once
again failed to gain a foothold on the world stage, even after a global economic crisis. As such,
though there are more currencies vying for usage, the status quo appears to be maintained. The
dollar will continue to be the world’s reserve currency moving forward.

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3. Research Design
This research study is focused on forecasting the value of USD index considering the various
variable factors that affect it. As a broad gauge of factors affect the same, major 10 factors that
affect the USD Index are taken.
The objective of the research study is recognizing the implication of the following on USD Index
in the light to past trends.
 US Trade deficit rate
 Tax rates
 Relation of USD with 5 major pegged currency
 Money Supply
 Interest rates
 US corporate debt rating over a period of time
 Possibility of dollar scarcity in Trump Era of global trade
Using these data three different models are determined, each showing future projection of dollar
price. Each model would be based on most obvious related and predictable future events and
specific assumption to suit the speculative aspect of currency market.
I. US Trade Deficit data
United States Balance of Trade Forecast is projected using an autoregressive integrated moving
average (ARIMA) model calibrated using analysts expectations. It models the past behavior of
United States Balance of Trade using vast amounts of historical data and adjusted the
coefficients of the econometric model by taking into account analyst assessments and future
expectations. The forecast for - United States Balance of Trade - was last predicted on Sunday,
April 16, 2017.

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United States Corporate Tax Rate Forecasts are projected using an autoregressive integrated
moving average (ARIMA) model calibrated using our analysts expectations. We model the past
behaviour of United States Corporate Tax Rate using vast amounts of historical data and we
adjust the coefficients of the econometric model by taking into account our analysts assessments
and future expectations. The forecast for - United States Corporate Tax Rate - was last predicted
on Sunday, April 16, 2017.

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III. Relation of USD with 5 major pegged currency
The index rebalances annually to capture annual trading flows versus the U.S. dollar as reported
by the Federal Reserve and the triennial survey of most liquid currencies from the Bank of
International Settlements. Each currency in the basket and their weight is determined annually
based on their share of international trade and FX liquidity. 2017 target weights are effective end
of business day, December 31, 2016:

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V. Interest rates
VI. Government holding of USD currency other than USA

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VII. US corporate/govt. Bond yield (10 year)
VIII. US National Debt

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IX. Global Currency Weights
If we divide total weights into import and export weights, the increasing role of China and
Mexico become even more apparent on the import side, as has the role of Mexico vis-à-vis Japan
on the export side. China is becoming increasingly important as a customer for U.S. exports as
well. Currencies are only a partial explanation for changes in trade weights. Other factors such as
labor costs, resource endowments and changes in national economic growth rates following
changes in internal political systems can be far more important than currencies in determining a
nation’s trade patterns.

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X. Possibility of dollar scarcity in Trump Era of global trade
Applying the seasonal method produces an estimate of the share of currency held abroad that
begins with about 40 percent in 1960 and then rises uniformly, reaching 70 percent by 1995.

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4. Source of Information
a. Bloomberg (bloombergindices.com)
b. Investopedia (investopedia.com)
c. US Debt clock (usdebtclock.org)
d. US Federal Reserve web (federalreserve.gov)
e. World bank (databank.worldbank.org)
f. Trading Economics (Tradingeconomics.com)

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5. Research Instruments
a. Forecast till year end (Q4) 2020-21 is projected using an autoregressive integrated
moving average (ARIMA) model calibrated using analysts expectations. It models the
past behavior of United States Balance of Trade using vast amounts of historical data and
adjusted the coefficients of the econometric model by taking into account analyst
assessments and future expectations.
b. MS Excel to forecast data for years 2021 & 2022.

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6. Data Interpretation & Analysis
 US Trade deficit data
The balance of trade influences currency exchange rates through its effect on the supply and
demand for foreign exchange. When a country's trade account does not net to zero – that is, when
exports are not equal to imports – there is relatively more supply or demand for a country's
currency, which influences the price of that currency on the world market.
Forecas
t
Actua
l
Q2/1
7
Q3/1
7
Q4/1
7
Q1/1
8
2020 2021(Trend
)
2022(Trend
)
Balance
of trade
-
43557
-
38000
-
40000
-
40000
-
49389
-
4800
0
~(49481) ~(50962)
After protectionist policies by Trump administration the trade deficit is expected to narrow
towards Q4 of 2017 but by the rate at which the credit card debt in The United States is growing
& after a bullish forecast of US GDP growth by IMF, the consumption of imported goods is
likely to increase which is likely to take an adverse inmpact on US Balance Of Trade. Hence
favoring a weaker dollar.

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 Tax rates
Corporate tax rates affect the supply and demand of US Dollar directly as a lower tax rate
would attract fresh slew of investments into the country, whereas a higher tax rate would
make domestic investments unattractive hence there would be an outflow of USD.
Forecast Last Q2/17 Q3/17 Q4/17 Q1/18 2020 2021(Trend) 2022(Trend)
Corporate
Tax Rate
38.9 35 35 32 30 26 ~24 ~22
The corporate tax rates in The United States are highest in the world. They are, as indicated by
the trump administration, to be reduced in order to make investment in the US more attractive
and boost company profits. This trend is likely to continue till 2022 and the corporate tax rates
are likely to fair lower. Thus favoring a stronger dollar index.

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 Relationof USD with5 major pegged currency
The index rebalances annually to capture annual trading flows versus the U.S. dollar as reported
by the Federal Reserve and the triennial survey of most liquid currencies from the Bank of
International Settlements. Each currency in the basket and their weight is determined annually
based on their share of international trade and FX liquidity.
The peg of USD with 5 major currencies is changing in favor of British pound, Canadian Dollar
& Mexican Peso since the trade weights of these countries (UK, Canada & Mexico) are
increasing with US historically & also in 2016. The share of trade of Europe & Japan is either
stagnant or decreasing, hence the target weight of their currencies has also decreased in 2017
weights.

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 Money Supply
The rise in domestic GDP due to increase in money supply will tend to increase the demand for
imports. The increase in imports will cause the current account to deteriorate. The increase in
imports purchased will increase the need to convert domestic to foreign currency. As a result,
the exchange rate of the domestic currency will decrease & Vice Versa.
Forecas
t
Actual Q2/17 Q3/17 Q4/17 Q1/18 2020
2021(Tren
d)
2022(Tren
d)
Money
Supply
M0
(USD
Million
s)
385626
0
397345
5
400261
1
401351
9
401498
2
401626
3
~4069597 ~4122931
The increase in money supply over the coming years as pledged by all the G7 finance ministers
in 2016 summit is likely to take effect from Q2 FY 2017. This would mean more availability of
US Dollar & more liquidity in the economy to fuel GDP growth. This would rather have
weakening impact on USD since more availability of USD has a weakening impact on the dollar
index.

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 Interest rates
The higher interest rates that can be earned tend to attract foreign investment, increasing the
demand for and value of the home country's currency. Conversely, lower interest rates tend to
be unattractive for foreign investment and decrease the currency's relative value.
Forecas
t
Actua
l
Q2/1
7
Q3/1
7
Q4/1
7
Q1/1
8
202
0
2021(Tren
d)
2022(Tren
d)
Unit
Interest
Rate
1 1.25 1.25 1.5 1.5 2.25 ~2.5 ~3.0 Percen
t
The latest data on business confidence index showed growing business sentiment in The United
States. The G-securities yields have reversed & they are indicative of higher interest rate regime
in line with the US Federal bank expectations. The rise in interest rates would mean more
investment in fixed income sources by global investors. Hence indicative of a stronger dollar.

32
The more attractive the USD, more will be its demand in foreign government reserve. Higher
foreign holdings plays the risk of currency manipulation by vested interest of the largest holder
which has never been played till date. It is said that 85% of dollar bills are with foreign
governments.
The government holdings of USD reserves by foreign governments is on a steep rise. A lot of
dollar holdings are with foreign governments. If they individually or few collectively decide
to sell all the holdings of this currency (to take revenge of some sort) they would cause a
sharp fall in US Dollar value. This might trigger a global sell off. Although this is highly
unlikely to happen but this is just an inactive factor which can be of a potential dampener to
the currency.

33
 US corporate/Govt. bond yield(10 Years)
Corporate bond rating is high and the bond yields are high, the country would attract more
investment into fixed income hence would make the dollar stronger. Since there is lower chance
of default as the companies are to be of strong financials, lower will be a chance of reversal of
strengthening of USD trend in the short term.
Forecas
t
Actua
l
Q2/1
7
Q3/1
7
Q4/1
7
Q1/1
8
202
0
2021(Tren
d)
2022(Tren
d)
Unit
Govt.
Bond
10Y
2.24 2.41 2.44 2.46 2.49 2.87 ~3.08 ~3.29 Percen
t

34
National debt in an long term determines the strength of a currency since initially there may be a
strong dollar inflow but on the long run, if sufficient growth momentum is not maintained, the
interest payment burden keeps on building up, there by weakening the currency. The interest
burden on US Economy today is close to 20 trillion dollars & rising. It is almost impossible for
the economy to cope up with making tactful payments without any defaults. US national debt is a
ticking time bomb.
Forec
ast
Actual Q2/17 Q3/17 Q4/17 Q1/18 2020 2021
(Trend)
2022(Tr
end)
Unit
Exter
nal
Debt
(81096
52)
(81218
29)
(81862
04)
(81812
99)
(80929
26)
(81310
45)
~(81381
76)
~(81453
07)
USD
Milli
on
The external dollar debt of the United States treasury is high & increasing. The government was
slow to recognize this mounting debt burden which is running out of their hands. The
government has now realized that they were ignorant and aggressive steps need to be taken to
stop this rising external debt burden. The steps of this government are not clear, but it is expect
of them to take effective measures in the short term which will have considerable effect to slow
down this rise in debt burden. This is ultimately expected to rise in year 2022 as the measures
would then fizzle out on the back of growing international trade environment & policies of

35
global protectionism followed by global major economies. This would have an adverse impact
on USD.

36
The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States
dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners'
currencies.
It is a weighted geometric mean of the dollar's value relative to other select currencies:
 Euro (EUR), 57.6% weight
 Japanese yen (JPY) 13.6% weight
 Pound sterling (GBP), 11.9% weight
 Canadian dollar (CAD), 9.1% weight
 Swedish krona (SEK), 4.2% weight
 Swiss franc (CHF) 3.6% weight
USDX goes up when the US dollar gains "strength" (value) when compared to other currencies
The countries like China, Mexico, etc., are likely to have more global share in trade in the future.
Hence their influence in Global currency weights is likely to fair higher.

37
7. Significance of this research study
The US dollar being the world reserve currency financially affects every country and almost
every individual in many ways possible. It affects the following markets thereby affecting the
prices of every product manufactured / consumed on this planet :
a. Currency Market: The impact of dollar index on currency market is quite obvious.
When the dollar index rises, global currencies (except those pegged like Behrain dinar)
falls relative to the USD. On the other hand, when the Dollar Index falls these global
currencies appreciate with respect to the USD.
b. Commodity Market: Commodity prices are usually inversely related to the dollar index.
Therefore, when the dollar index rises, prices of commodities like crude, metals etc falls
and vice versa. Gold has a strong inverse relationship with dollar index. In the last 3
years, dollar index has risen by around 20%, while gold has fallen by around 20%.
c. Bond Market: Dollar index also has an impact on Indian bond markets, though the
impact is not as strong as that on currency and commodity markets. When dollar index
falls, Foreign Institutional Investors (FIIs) invest more in bonds, causing bond yields to
fall and bond prices to rise. On the other hand if the dollar index rises, FIIs may sell
bonds causing bond yields to rise and bond prices to fall. Dollar index has an indirect
impact on bond markets. When dollar appreciates versus the rupee, imports become more
expensive causing current account deficit to increase. Increase in the current account
deficit causes bond yields to rise and bond prices (especially long maturity bonds) to
falls. Fall in dollar index has the opposite effect on current account deficit and bond
prices. The impact of dollar index on debt mutual fund returns is exactly the same as the
impact on bond market
.
d. Equity Market: Dollar index also has an impact on Indian equity markets. However, the
impact of dollar index is more pronounced in the short term. In the long term, other
factors have a bigger impact on equity returns. . When dollar index falls, FIIs invest more
in Indian equities because they expect higher dollar returns (with appreciation of INR
versus USD) and when it rises, they invest less because they expect lower dollar returns
(with the depreciation of INR versus USD). Rise in dollar index signifies increasing risk
aversion in global investor sentiments. Why? The safest asset in the whole world among
all asset classes is believed to be the US Treasury bonds (US Government bonds). If the
investors are uncertain about the global economy and in most asset classes, they will seek
safety of their money by investing in US Treasury bonds. To buy US Treasury bonds,
investors will have to buy dollars and as a result the dollar index will rise. Therefore, rise
in dollar index signifies risk aversion. On the other hand, fall in dollar index, signifies

38
optimism about the global economy and investors will sell US treasuries to buy other
assets, including Indian equities. It is to be remembered that, the dollar index impacts
equity returns only in the short term. In the long term, factors like GDP growth, earnings
growth of companies, Government policies, political stability, global macro-economic
factors etc have a bigger impact. In the short term, dollar index has different impact on
different sectors. For example, rise in dollar index are likely to cause a drop in share
prices of companies in cyclical sectors (domestic consumption oriented sectors, e.g.
Banking, Automobiles, Oil and Gas, Capital Goods, Metals etc). However, rise in dollar
index will be good for export oriented sectors like Technology, Pharma etc, because
exports will become more competitive with depreciation of the INR. Share prices of
companies in these sectors would rise with rise in dollar index.

39
8. Conclusion
Based on data analysis & interpretation of the proposed research, it can be concluded that the
following factors should have a favorable/adverse/neutral impact on dollar index in the next
5 years I.e., till financial year 2022 end.
a. Favorable
 Corporate Tax Rates
 Interest Rates
 US Corporate/Government bond yield (10 Years)
b. Adverse
 US Trade Deficit
 Total Money Supply
 Reserves of USD with foreign governments
c. Neutral
 Relation of USD with 5 major pegged currencies.

40
Forecast
The United States Dollar is expected to trade at 107.00 by the end of this quarter(Q1 2017-18),
according to Trading Economics global macro models and analysts expectations. Looking
forward, it is estimated to trade at 113.00 in 12 months time.

41
9. Limitations Of This Research
This report forecasts data based on historical trends. It does not take into account variable factors
that could impact USD since these factors are unpredictable and unforeseeable. These factors can
be as follows :
a. French Elections
b. Fr-exit possibility
c. Br-exit impact
d. Tensions between US & North Korea etc.,
There can be various other methods of financial forecasting using different other methods like
demand forecasting model. Hence the forecasted trends of other models comparatively can be
conflicting in terms of dollar value/index.
A fundamental approach to forecast the US Dollar index has been used which is helpful in long
term forecasts. There is no use of technical approach which is useful in predicting the trend in the
short term.
Hence, forecasts can never provide fully accurate results; otherwise a currency exposure would
not be a risk. Forecasts do provide a modelled assessment of the likely movement of foreign
exchange rates over a certain time frame.
There can be varying other limitations to this research & the ones mentioned above are what the
researcher found to be once that could most like diverge the forecast targets.

42
Bonafide Certificate
Date: 05.05.2017
This is to certify that this project report titled "FAIR VALUE OF US DOLLAR IN NEXT 5
YEARS" which is to be submitted to the office of, 'The registrar, The Maharaja Sayajirao
University Baroda' has been prepared by Mr. Yash Tejas Dave, Exam seat number 617149 as a
partial fulfillment of BACHELOR OF COMMERCE (B.COM) HONOURS with specialization
in 'Accounting & Financial Management' for evaluation in lieu of the annual examination to be
held in June 2017
He has carried out his work under my personal supervision and guidance.
(Signature of the guide)
Mr. Urjit Pandya
Teaching Faculty
Faculty of Commerce
The M.S. University Of Baroda
Vadodara

43
Certificate of Originality
I, Yash Tejas Dave, the undersigned hereby declare the project report entitled "FAIR VALUE
OF US DOLLAR IN NEXT 5 YEARS" submitted in partial fulfillment of B.Com Honours
with specialization in 'Accounting & Financial Management' for evaluation in lieu of Annual
Examination to be held in June 2017, is my own work & has been carried out under the guidance
of MR. URJIT PANDYA. The work is an original one and has never been earlier submitted to
this university or any other institution / organization for the fulfillment of the requirement of a
course or for award of any Degree / Diploma / Certificate. All the sources of information used in
this project report have been duly acknowledged in it.
(Signature of research student)
Exam seat number : 617149
BACHELOR OF COMMERCE (B.COM.) HONOURS
DEPARTMENT OF ACCOUNTS & FINANCIAL MANAGEMENT
FACULTY OF COMMERCE, THE M.S. UNIVERSITY BARODA
VADODARA (Gujarat)

44
Acknowledgement
I am thankful to my prestigious institute The Maharaja Sayajirao University Baroda for giving
me a platform to present my research & an opportunity to learn under their shed.
I would like to thank and express my deepest sense of gratitude to my project guide Mr. Urjit
Pandya. I am indebted to him for providing me their valuable guidance at all stages of the project
report. His advice and think tank knowledge was really helpful.
I would also like to thank Dr. Umesh R. Dangarwala (Associate Programme Director) who
inspite of his busy schedule has cooperated with me throughout my project.
I submit my earnest thanks to my affectionate parents, who remain at back to support this
endeavor of mine. I go on to pay gratitude to all those who have helped me completing this
report, directly or indirectly.
Place : Vadodara
Date : 05.05.2017
(Yash Tejas Dave)

Forecasting of US Dollar value in next 5 years (2022)

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