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“Don’t Sweat the Dollar”Investor WorriesIt’s Too Soon to WorryRecent Exchange RatesDollar Previously OvervaluedWhy Are Investors Afraid?Why Shouldn’t They Fear?Advantages of a Lower Exchange RateSolutions to the “Problem”What Should We Do?“Don’t Sweat the Dollar”Presented byAmy KleinFortune Magazine, August 12, 2002Written by Rob NortonInvestor Worries•Terrorist threats•Looming warfare•Corporate scandals•Recent decline of the dollar against foreign currenciesIt’s Too Soon to Worry•Dollar not low by historical standards •Long-term time horizon•Rates still well above the ‘90s•Exchange remains competitive with foreign currenciesRecent Exchange Rates Euro•Launched Jan. 1, 1999, at $1.17•1½ yrs lost 25% against the dollar•2000 only $.83; now $1.00 Japanese Yen•Dollar is slightly above 10-year averageDollar Previously Overvalued•Continued climb through 2001 economy slump •Forecasted months ago to fall 20%•Argument: $ can sink another 10% without being undervaluedWhy Are Investors Afraid?•Decreasing purchasing power•Increasing import prices fueling inflation•Depressed value of foreign investment•Compromise to U.S. economic recoveryWhy Shouldn’t They Fear?•Import prices have barely budged•Dollar must fall considerably before inflation increases•25% decline to threaten foreign investment and recoveryAdvantages of a Lower Exchange Rate•Competitive U.S. goods – benefits smokestack America•Lower dollar value beneficial for manufacturers•A strong dollar detrimental to U.S. exports•Falling dollar helping manufacturers to recoverSolutions to the “Problem”•Treasury can buy dollars and sell foreign currencies Problem: effects only momentary•Federal Reserve can increase interest rates Problem: impair overall economic recoveryWhat Should We Do?•Hold out for economic recovery•Current slump only temporary•Is innovation, productivity, economic growth higher anywhere


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UIC BA 200 - Exchange Rates

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