Universal Circuits
1. Does Universal Circuit's Irish controller have a convincing argument for the weakness of the dollar? Why or why not? How do you interpret the evidence?
The Irish controller certainly presented a very convincing argument. He argues that since the American trade deficit has been growing, the dollar will be likely to depreciate.
From 1980 to 1984 the dollar appreciated against the punt by about 50% and interest rate averaged 12.6% during the same period. These high interest rates have caused the dollar to appreciate against other currencies and slowed down the high inflation rate (10% in 1981) during that same period of time. Irish controller’s main worry was that the dollar will be likely to depreciate. Over the last 2 years inflation has fallen to 5%, much lower than the 10% rate in 1981. A lower inflation rate could result in the US government lowering interest rates, which could cause the US dollar to decline. Increasing trading deficit, lower inflation, and lower interest rate signals a possible weakening dollar
On the other there is a more optimistic view on the direction of the dollar. Despite the US worsening balance on current account, the US dollar will likely to appreciate in both nominal and real terms due to foreign capital inflows motivated by good performances in equity and real estate markets, high real interest rate, and long-run prospects for growth and profitability. In other words, despite its large trade deficit, the US is still seen as a safe and profitable market to invest.
The point of the CFO of universal circuits is that no one really knows in which direction the dollar will go and therefore speculating on this issue was of no real interest to those in the manufacturing business. 2. In view of the fact that the dollar is the Irish subsidiary's functional currency, should the controller be worried about its exchange value? What is the nature of the foreign exchange exposures(s) faced by the Irish subsidiary? Why isn't the
The Irish controller certainly presented a very convincing argument. He argues that since the American trade deficit has been growing, the dollar will be likely to depreciate.
From 1980 to 1984 the dollar appreciated against the punt by about 50% and interest rate averaged 12.6% during the same period. These high interest rates have caused the dollar to appreciate against other currencies and slowed down the high inflation rate (10% in 1981) during that same period of time. Irish controller’s main worry was that the dollar will be likely to depreciate. Over the last 2 years inflation has fallen to 5%, much lower than the 10% rate in 1981. A lower inflation rate could result in the US government lowering interest rates, which could cause the US dollar to decline. Increasing trading deficit, lower inflation, and lower interest rate signals a possible weakening dollar
On the other there is a more optimistic view on the direction of the dollar. Despite the US worsening balance on current account, the US dollar will likely to appreciate in both nominal and real terms due to foreign capital inflows motivated by good performances in equity and real estate markets, high real interest rate, and long-run prospects for growth and profitability. In other words, despite its large trade deficit, the US is still seen as a safe and profitable market to invest.
The point of the CFO of universal circuits is that no one really knows in which direction the dollar will go and therefore speculating on this issue was of no real interest to those in the manufacturing business. 2. In view of the fact that the dollar is the Irish subsidiary's functional currency, should the controller be worried about its exchange value? What is the nature of the foreign exchange exposures(s) faced by the Irish subsidiary? Why isn't the