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Prospective Capital Flows and Capital Movements: U.S. Dollar Versus Euro

After experiencing long, multiyear surges and slides in past decades, by summer 2013, the dollar had been range-bound against the euro. In this case, by assessing potential capital flows, students consider whether global currency market trends would propel the dollar higher, or if the past few years were just a pause in a much longer dollar depreciation episode. Suitable for both core and elective MBA courses in global financial markets and international finance, this case explores factors pointing to further euro appreciation and to others favoring the dollar. Sorting through mounds of evidence is necessary before forecasting the exchange rate's likely path. Filtering that evidence requires thinking about FX markets, prospective monetary policies, and past and prospective international capital flows. Excerpt UVA-BP-0545 Rev. Nov. 13, 2014 Prospective Capital Flows and currency movements: U.S. Dollar VERSUS Euro As Luke Anthony was riding the early-morning Metro-North train from Grand Central Station to Greenwich, Connecticut, in July 2013, the euro dominated his thoughts. After bottoming out at about (U.S. dollars) USD0.85 per euro in 2000 and 2001, the euro then appreciated sharply for a number of years, reaching a record of USD1.59 per euro in early 2008 (Exhibit 1). Then the global financial crisis (GFC) hit, and the dollar surged against the euro, appreciating by 20% in just a few months. Since then the dollar/euro rate, while volatile, had remained within the range of USD1.20 to USD1.50 per euro. Anthony, a foreign-exchange (FX or forex) strategist at a hedge fund, had to decide on the likely path of the dollar/euro rate going forward. Did the peak the euro put in of USD1.59 per euro in 2008 represent a major turning point that could last for years? Was that actually the beginning of a new trend in global currency markets that would propel the dollar toward all-time highs against the euro? Or did the euro just have to get through its rough patch due to the GFC and subsequent euro zone crisis, and as it emerged from that, it would be propelled to new highs against the dollar? . . .