A weaker euro and stronger dollar sent the euro US dollar exchange rate tumbling for a seventh straight session on Monday. The pair continued to lose ground overnight, dropping to a low of US$1.0931.
|What do these figures mean?|
|When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written:
1 EUR = 1.12829 USD
Here, €1 is equivalent to approximately $1.13. This specifically measures the euro’s worth against the dollar. If the U.S. dollar amount increases in this pairing, it’s positive for the euro.
Or, if you were looking at it the other way around:
1 USD = 0.88789 EUR
In this example, $1 is equivalent to approximately €0.89. This measures the U.S. dollar’s worth versus the euro. If the euro number gets larger, it’s good news for the dollar.
The euro was out of favour in the previous session as investors digested yet more weak data from Germany. The German manufacturing pmi showed that the sector remained deep in contraction in August. Weaker demand amid Brexit and the US – Sino trade dispute resulted few orders and German manufacturing firms scaling back production and cutting jobs. The pmi data showed that the manufacturing sector, which accounts for around 20% of economic activity in German was just 43.5. The figure 50 separate expansion from contraction.
The weak data from Germany come following numbers last week that showed that inflation in Europe’s largest economy fell by more than forecast and unemployment increased. Data is painting a dismal picture of Germany as fears grow that the economy is heading towards recession. The European Central Bank (ECB) will almost certainly take action when they meet in September, loosening monetary policy.
|Why do interest rate cuts drag on a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower.|
Today investors will look ahead to a speech by Christine Lagarde, the new ECB President from October. Any hints from Lagarde that she will continue Draghi’s approach of accommodative policy could keep the euro under pressure.
US Manufacturing Data In Focus
The dollar strengthened across the previous session and has continued to rally overnight. Concerns over where the US – Sino trade dispute is heading, plus Brexit chaos is sending investors in search of safe heavens. The dollar, the reserve currency of the world, often gains in times of economic and or geopolitical uncertainty.
Today investors will look towards US manufacturing data and US – Sino trade developments. US and Chinese officials struggle to agree on a schedule for talks this month which doesn’t bode well for a speedy resolution to the ongoing dispute.
Investors will be keen to see whether the trade war continues to negatively impact US manufacturing sector. Any signs of further weakness could weigh on demand for the dollar.
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