The euro finished the previous session just 10 points lower versus the U.S. dollar as investors digested disappointing U.S. data, an Italian bank bailout or two as well as European Central Bank (ECB) President dashing hopes of an interest rate rise once again.
The euro U.S. dollar exchange rate concluded the previous session at $1.1181 after hitting a session high for the euro of $1.1220. This level is the strongest level for the euro against the U.S dollar since mid-May.
|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 moved lover versus the dollar in early trade as more details came to light regarding the bailout of two Italian banks. Over the weekend the ECB agreed that the Italian government could bail out Veneto Banca and Banca Populare di Vicenza at a potential cost of €17 billion. Italy is already bailing out another of its banks for €6.6 billion. The overriding fear was that the Italian banking system could potentially threaten the stability of the eurozone financial sector. However, as these fears resided ,the euro was able to gain some ground.
Investors will now look ahead to a speech from ECB President Mario Draghi later this morning. Draghi already poured cold water on interest rate expectations on Monday by once more talking up the benefits of the loose monetary policy. Investors won’t be holding their breath for a different tone from Draghi today.
Disastrous durable goods orders weaken the U.S. dollar
U.S. durable goods orders shrank by 1.1% in May, almost twice as much as what Bloomberg analysts were expecting. This means that both U.S. businesses and consumers are choosing to hold back from spending on costly one-off items such as cars, appliances and machinery. A slowing in spending is not good news for inflationary pressures of an economy, nor for the growth of the economy itself. As a result, the dollar came crashing down, boosting the euro in the exchange rate.
|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.|
Dollar traders will look ahead to this afternoon when several Federal Reserve Officials will speak, including Federal Reserve Chair Janet Yellen. The market is looking for clarification, as last week several Federal Reserve speakers gave positive statements regarding the outlook of the U.S. economy, but hard data is simply not supporting these upbeat outlooks. As a result, investors are starting to rein in their hopes of an interest rate hike which has in turn weighed on the price of the dollar. Should Janet Yellen give any hints that a rate hike is out of the question until certain economic indicators improve, then the dollar could take a step lower.
|Why do raised interest rates boost 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. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.