There are many underlying issues as to why the USD was so strong in 2005, however, the primary reason for it’s appreciation was the continuing expectation that interest rates would go higher.  At the start of the year interest rates stood at 2.25% and by December 2005 finished the year at 4.25%. 

The net result of these successive hikes meant that the attractiveness of the currency to overseas investors - due to higher yields - increased significantly and consequently helped traders and investors look past the U.S’s bulging trade and budget deficits.  The U.S was also starting to show strong signs of economic growth and stability.  Housing prices were on the up and consumers appetite for spending was near all time highs; both positives for the US. 

So what lies ahead for 2006?  With the Federal Open Market Committee (FOMC) having given its clearest signal yet that the interest rate cycle is drawing to a close, attention will once again focus on the major structural imbalances which remain evident in the US economy.  A swelling trade deficit (which stands at 6% of Gross Domestic Product) is a major concern to investors. Many realize that a weaker USD is one way to help rectify this imbalance.  In addition to this, the European economy seems to have weathered the storm and is showing the first signs of a recovery and of growth.  The market expectations for European growth should increase the possibility for another 25bps rate hike from the ECB.  In summary the year ahead promises to be another year for big moves in the currency markets and in particular EUR/USD.  This just heightens the fact that having a comprehensive purchasing strategy for your currency is all the more important.

This involves putting down a 10% deposit to secure the current rate of exchange which can then be held for up to two years.  This way of buying currency is flexible and can accommodate changes in the time scale originally agreed – due to delays in the purchasing process etc. The worst thing to do is sit back and do nothing! 

There are often many factors influencing the foreign exchange markets and because of this it is impossible to predict future rates of exchange with 100% accuracy. HIFX, however, are world renowned for their market views, and Reuters consistently rank them in the worlds top three most accurate currency forecasters. Although they cannot predict the future, the Private Client Consultants will implement a strategy, free of charge, to help you manage your currency risk as efficiently as possible.