HIFX European Market Report

Posted by — December 18, 2005

HIFX European Market ReportWhat has caused the Euro to fluctuate against the Dollar over the past three months?

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.  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 off.

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.

Please do not hesitate to contact the team of consultants on the Private Client Desk at HIFX Inc. To contact the Private Client Team please call: (415) 678-2770, email enquiries to info@hifx.com or visit the website: www.hifx.com

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