...because the European interest rates are so low. Apple will borrow in euros, sell the euros to buy dollars (called the "carry trade"), and return the dollars to shareholders. This is an increase in the supply of euros in the market for foreign exchange, which depreciates the euro relative to the dollar. In fact, a lot of speculators are betting on a stronger dollar or a weaker euro.
Think of how a lower U.S. interest rate would affect a foreign borrower or a foreign investor. A foreign borrower would increase borrowing in dollars in response to the lower U.S. interest rate. He/ She would borrow dollars from a U.S. bank, and then sell the dollars to buy the yen to invest in Japan. This is sometimes referred to as the “carry trade”. You should recognize this as an increase in the supply of the dollars (“selling” dollars), which makes the dollar depreciate against the foreign currency (Luke, McCann, Shor, & Ward; 2014). This is a clear case of what Apple was doing to maximize its returns. The article states that in fact, a lot of speculators are betting on a stronger dollar or a weaker euro. The diagram below clearly shows how the dollar has gotten stronger vs. the euro.In the past 6 months the USD went from .77 to .89 vs. the Euro. (Tried to attach diagram from Bloomberg, however attached the link for comparisons)
ReplyDelete(http://www.bloomberg.com/quote/USDEUR:CUR/chart)
The U.S. dollar will continue to get stronger vs. the euro, however the question is how much longer it will be able to strengthen. This has come a long way, since when I visited Portugal about 7 years ago and for $100 USD, I got $67Euro. Needless to say it was a very expense trip, however I may be looking going back soon and the trip will be a little bit more affordable. However, it will also be interesting to see how the shift in dollars will impact foreign tourism (especially European countries) will be impacted as the euro continues to decrease.
Luke, F., McCann, B, Shor, M., & Ward, M. (2014). Managerial Economics; A Problem Solving Approach (3rd ed., p. 128). Mason: South-Western Cengage Learning
At the moment EURO is indeed at very low point and that’s why we need to be careful in how we go about things. This lower US interest rate has affected things quite a lot and that’s why trading on dollar is seriously tough. I usually prefer long term trades and due to swap free account by OctaFX broker, I am able to do it fairly easily without having to pay anything extra while even the risk is lowered when there is no extra stuff needed to be paid.
ReplyDelete