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July 19, 2005
Bullish On The Euro
Some analysts feel that short-term factors rather than fundamentals have driven the euro's rapid fall this year, and the euro could still head back to record levels...
Analysts use various technical models to calculate a currency's fair value but they are based on similar variables including differences in economic growth, interest rates, inflation, productivity, investments, terms of trade and equity prices...
In case you are wondering what fair value means, I think the answer is something like "long-run equilibrium value":
Fair value, or the value to which a currency should adjust to over time, is used by companies making long-term investments overseas that need to hedge against currency swings.
So where does "fair value" take us?
Goldman sees the euro back at $1.30 in 12 months' time on concerns that the United States may find it difficult to attract enough investment to offset its gaping trade deficit -- at record levels as U.S. consumers snap up cheap imported goods.
"Real economy adjustments are relatively slow to filter through. And that's where the disconnect between fair value and current account deficit comes in," Stolper said. "The United States is still importing like crazy, creating a large imbalance."
A caveat: Be wary of any article that confuses movements along demand curves with shifts in demand curves:
The euro could also recover as central banks, particularly those in oil-rich nations, start buying euros again at more attractive levels to diversify their reserves.
That one can't be blamed on the Goldman gang, of course, so judge for yourself.
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