david woo presentation May 1108

USD: Vicious Circle David Woo Head of Global FX Strategy, Barclays Capital

America is running both expansionary monetary and loose fiscal policies 15 Real Fed Funds rate

Budget balance as a share of GDP

percent

10 5 0

2

Mar-07

Mar-05

Mar-03

Mar-01

Mar-99

Mar-97

Mar-95

Mar-93

Mar-91

Mar-89

Mar-87

Mar-85

Mar-83

Mar-81

Mar-79

Mar-77

Mar-75

-10

Mar-73

-5

Periods of such policy stance were always characterized by a weak USD periods of negative real Fed Funds rate and budget balance<-3% of GDP real trade-weighted USD index against major currencies 140 130 120 110 100 90

3

Mar-07

Mar-05

Mar-03

Mar-01

Mar-99

Mar-97

Mar-95

Mar-93

Mar-91

Mar-89

Mar-87

Mar-85

Mar-83

Mar-81

Mar-79

Mar-77

Mar-75

70

Mar-73

80

Eurozone exporters may be suffering from the strengthening euroâ&#x20AC;Ś.

US export to eurozone (USD, 6m/ 6m, SA, AR)

40

eurozone export to US (EUR, 6m/ 6m, SA, AR)

30

percent

20 10 0 -10

4

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

-30

Jan-95

-20

…but euro’s rise against the USD has been supported by evolving relative fundamentals

0

1.2

-1

1

-1.5

0.9

-2 Q1-08

Q2-07

Q3-06

Q4-05

Q1-05

Q2-04

Q3-03

Q4-02

Q1-02

Q2-01

Q3-00

Q4-99

-2.5 Q1-99

0.8

1 0

1.1

-1

1 -2

0.9 0.8

-3 Q1-08

-0.5

1.1

5

1.3

Q1-07

1.2

0.5

Q1-06

1.3

1.4

Q1-05

1

2

Q1-04

1.4

3

fiscal diff

1.5

Q1-03

1.5

real eur/ usd

Q1-02

2

1.5

1.6

Q1-01

2.5

real int diff

Q1-00

real eur/ usd

Q1-99

1.6

EUR/USD uptrend and oil uptrend are becoming mutually reinforcing

70

1.27

60

6

2/ 4/ 08

2/ 1/ 08

2/ 10/ 07

2/ 7/ 07

2/ 4/ 07

2/ 1/ 07

2/ 10/ 06

2/ 7/ 06

2/ 4/ 06

1.17

2/ 1/ 06

1.22

50

-40 -60 28/ 12/ 2007

1.32

-20

28/ 12/ 2006

80

1.37

0

28/ 12/ 2005

1.42

28/ 12/ 2004

90

20

28/ 12/ 2003

1.47

USD per barrel

100

1.52

40

28/ 12/ 2002

110

1.57

28/ 12/ 2001

Brent crude 6-month fut ures (right axis)

52 week rolling correlation between EUR/ USD and Brent futures

28/ 12/ 2000

1.62

60

28/ 12/ 1999

120

28/ 12/ 1998

EUR/ USD (left axis)

percent

1.67

USDâ&#x20AC;&#x2122;s vicious circle

7

This is the first time in twenty years that Eurozone inflation is rising while the Fed is cutting rates 5

Fed rate cut cycle

eurozone inflation (y/ y)

4.5 4 3.5 3 2.5 2 1.5 1

8

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

Jan-94

Jan-93

0

Jan-92

0.5

Increase in oil prices has prevented an improvement of US trade deficit, despite US slowdown and USD weakness Breakdown of US trade balance

10 0

-20 -30 -40 -50 -60

9

Indust rial supplies, excl petroleum goods

Consumer goods

Aut o and parts

Food, feeds, and beverages

Ot her goods Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

Jan-94

Jan-93

Jan-92

pet roleum goods Jan-90

-70

Capital goods

Jan-91

bln of USD

-10

Preconditions for a sustainable USD recovery • Sharp slowdown in China: such an event would dampen global marginal demand for oil, and, by triggering a correction of oil prices, break the vicious circle.

• Big correction of the US equity market: there are no signs of any decoupling of ROW from US financial markets. Synchronized equity sell-off would be followed by synchronized global economic slowdown • Visible negative knock-on effect of USD decline on US asset prices: If further USD decline were to reduce appetite for US assets and drive down US asset prices, then US policy makers may be forced to change their ways 10

But if China is slowing at all, it is slowing very gradually 100

sales of vehicles (y/ y)

80

80

sales of vehicles (y/ y, 3-m MA)

60

China's crude oil imports (y/ y) 3-m MA

60 40 percent

percent

40 20

20 0

0

-20 -20

11

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

-60 Jan-00

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

-40

-40

Meanwhile, global oil inventory remains tight 360

US crude inventory

240

US gasoline stock

350 2008

230

340 330

2007

2006

2005

220

320 210

310 300

200

290

2008

2007

2006

2005

190

280 180

270 1

12

7

13

19

25 31 week

37

43

49

1

5

9 13 17 21 25 29 33 37 41 45 49 week

Bond vigilantes are suppressed by inelastic demand from reserve managers 140

160

Spread between 1 year IRS 9 year forward and 1 year IRS 4 year forward

140

Foreign official sector accumulation of USD assets (4Q-MA, left axis)

120

Foreign official sector accumulation of USD assets/ Current account (4Q-MA, right axis)

100

80 60 40

60 50

80

40 60

30

20

40

Q3-07

Q4-06

Q1-06

Q2-05

Q3-04

Q4-03

0

Q1-03

0

Q2-02

10

Q3-01

20

Q4-00

01/ 05/ 2008

01/ 01/ 2008

01/ 09/ 2007

01/ 05/ 2007

01/ 01/ 2007

01/ 09/ 2006

01/ 05/ 2006

01/ 01/ 2006

01/ 09/ 2005

01/ 05/ 2005

01/ 01/ 2005

01/ 09/ 2004

01/ 05/ 2004

01/ 01/ 2004

-20

20

Q1-00

0

13

70

percent

100

bln of USD

basis points

120

80

Positioning and sentiment indicate scope for further USD rally in the short-term is limited

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Disclaimer This presentation has been prepared by Barclays Capital – the investment banking division of Barclays Bank PLC and its affiliates worldwide (‘Barclays Capital’). This publication is provided to you for information purposes, any pricing in this report is indicative and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has been obtained from sources believed to be reliable but Barclays Capital does not represent or warrant that it is accurate and complete. The views reflected herein are those of Barclays Capital and are subject to change without notice. Barclays Capital and its respective officers, directors, partners and employees, including persons involved in the preparation or issuance of this document, may from time to time act as manager, co-manager or underwriter of a public offering or otherwise deal in, hold or act as market-makers or advisors, brokers or commercial and/or investment bankers in relation to the securities or related derivatives which are the subject of this report.

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Copyright in this report is owned by Barclays Capital (© Barclays Bank PLC, 2005) – no part of this report may be reproduced in any manner without the prior written permission of Barclays Capital. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP.

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