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What has caused EUR/USD
to fluctuate over the past three months?
By Douglas
Johnson
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| Since September 2005
EUR/USD has been trending in a strong downward direction resulting in over
a 9 cent movement (1.2580 high, 1.1638 low). To place a monetary
value on this move if you were to buy a property in September 05 priced
at 100,000 euros it would have cost you $125,800. The same property in
November 05 would have cost you $116,380, that is over a $9,0000 saving.
So why has there been such a move?
There have been many reasons for
the decline in EUR/USD; however the most significant of them has been the
growing interest rate yield gap between the U.S. (3.75) and Europe (2.25).
The FOMC (Federal Open Market Committee) have continued to stick to their
measured pace policy and raised rates by 25bps throughout 2005. This is
in stark contrast to the ECB (European Central Bank) who have only raised
rate by 25bps in the last 29 months. Furthermore, the political uncertainty
in Germany over the possible joint coalition between Schroeder and Merkel
did little to excite trader’s appetite to invest in the Euro. |
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With this
said it has not been smooth sailing for the U.S. The unfortunate events
of Hurricanes Katrina and Rita sent oil prices rocketing to all time highs
($61 a barrel) and traders feared the hurricanes would have long term and
far reaching implications for the U.S. economy. However, by in large
the U.S. economy was largely unaffected by the disasters and this was clearly
evident in a statement made by the Federal Reserve who deemed the after
effects of the hurricanes only to be temporary on what was already a very
strong economy.
With the U.S.
interest rate cycle nearing an end the underlying structural imbalances
of the U.S. will once again come to the fore. With the U.S. trade
deficit at some $66bn (month on month) the U.S. have become heavily reliant
on overseas investment to plug the black hole left by the trade imbalance.
With the economic fundamentals now shifting in favor of Europe we may well
see the U.S. unable to attract the necessary amount of overseas investment
and consequently leading to a weaker dollar. In contrast Europe has
been in a dark period of late with both Germany and France suffering from
extreme unemployment rates, political instability and a manufacturing slowdown.
Europe though appears to have turned a corner and the latest economic studies
suggest that the EU is on the road to recovery and economic prosperity.
This will certainly find favor with traders. In summary whilst
further short term USD gains can not be ruled out, expectations are for
levels nearer to that of September to come back into view and as a client
who is potentially investing in property within in the European community
this is something to be mindful of.
Therefore,
looking at the current levels a sensible strategy for someone buying property
in France would be to secure as much of the currency needed straight away
– thus fixing the cost at the outset. If all the funds are not available,
the exchange rate can still be secured by purchasing one or more “forward
contracts”. This involves putting down a 10% deposit to secure the current
rate of exchange which can then be held for up to two years, at which point
the balance (the remaining 90%) needs to be settled. This way of buying
currency is flexible and can accommodate changes in the time scale originally
agreed – due to house sales falling through etc. The worst thing to do
is sit back and do nothing!
There are many
factors that influence the foreign exchange markets and thus it is impossible
to predict future rates of exchange with 100%. HIFX, however, are world
renowned for their market views and consistently ranking within the worlds
top three most accurate currency forecasters. Although they cannot predict
the future, their Private Client consultants will help you implement a
strategy, free of charge, to help you manage your currency risk as efficiently
as possible.
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| Douglas
Johnson works on the Private Client Desk at HIFX Inc. To contact HIFX,
or any of the Private Client Team please call: USA 415 678-2770 and ask
for Tatiana Bidgood, email enquiries to info@hifx.com
or visit the website: www.hifx.com |
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