The euro US dollar exchange rate skidded lower on Monday amid persistent demand for the dollar. The euro US dollar dropped to a low of US$1.0994 before closing 0.7% lower on the day at US$1.1004. The pair is advancing in early trade on Tuesday.

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 declined in the previous session primarily owing to strong demand for the dollar in a risk off environment. However, another headline which also weighed on demand for the euro came from the World Trade Organisation (WTO), which ruled in favour of the US in the case of illegal subsidies granted to European aerospace Airbus. Market participants fear that the US will now apply punitive tariffs to EU products, potentially in the region of $21 billion.  This would be damaging to the EU economy.

The euro could remain vulnerable today as investors look towards the ZEW sentiment data from the eurozone and more particularly Germany. Economic confidence in the region has been steadily declining across recent months. German economic sentiment hit a low in August of -44.1. Whilst analysts expect the figure to tick slightly higher to -38 this still reflects significant pessimism and points to a recession in the third quarter for Germany, Europe’s largest economy.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

 

Will US Manufacturing Data Hit Dollar?

The dollar was in demand in a risk averse session on Monday. Firstly, data showed that Chinese industrial growth slowed to the lowest level in 17 years, stoking fears that the US – Sino trade dispute and slowing economic activity is weighing on the world’s second largest economy.

Risk aversion continued as investors digested the attacks on the Saudi oil infrastructure over the weekend. President Trump said the US is “locked and loaded” should evidence point towards Iran being responsible. With tensions elevated in the middle east, investors looked towards the US dollar, for its safe haven properties.

Today investors will continue to watch developments in the middle east. Any sign that the US will attack Iran could send the US dollar higher.

US economic data will also be under the spotlight ahead of the US Federal rate decision on Wednesday. US industrial production and manufacturing have struggled amid the ongoing trade dispute. Investors will be watching for signs of a deepening slowdown in the sector. Even if the data does print better than analysts forecast, it is unlikely to adjust investor expectations of a rate cut from the Federal Reserve.

 

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.

 

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