2005 the Euro lost over 14% of its value against a resurgent US Dollar.
This move meant that had you purchased a property priced at €200,000
in April 2005, you would have paid $260,000 (22nd April 05 - 1.3000).
Would you have purchased that same property in November you would
have paid 236,000, a saving of $24,000 (4th Nov 05 – 1.1800). So
what caused the USD to appreciate so much? And will it continue to
do so through 2006?
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.
this stage it is also important to evaluate the economic climate within
Europe during 2005. Germany, Europe’s largest economy, had spiraling
unemployment levels and the manufacturing sector was crippled. This
acted by in large as a drag on the European economy. Furthermore,
both Italy and France were experiencing economic uncertainty, and although
the European Central Bank (ECB) raised rates for the first time in 29 months
it was not enough to inspire confidence in the European Union.
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.
looking at the current levels a sensible strategy for someone buying property
in the Euro zone 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
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.
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