Recession fears sent the euro US dollar exchange rate lower on Thursday. The pair dropped to a nadir of US$1.1130, closing below US$1.12 for a second straight session. This morning the pair is clawing back some of yesterday’s losses.
| 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. |
Demand for the euro wavered in the previous session as investors reacted to German GDP data. Data showed that the German economy contracted by -0.1% in the second quarter, down from 0.6% growth in the first quarter of the year.
The weak reading comes following a slew of soft data from the German economy, including industrial output falling by -1.5% in June. The US — Sino trade war has been a central factor to the declining economic performance of Germany, as both the US and China are key export markets for Germany. The fear is that a recession in Germany, Europe’s largest economy could quickly spill over into the rest of Europe.
With German in contraction and fears of other economies in the eurozone following suit, market participants believe that the European Central Bank will look to adopt a more dovish stance in September. The prospect of weaker monetary policy sent the euro lower.
| 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 there is no eurozone economic data. Instead investors will continue weighing up the probability of Germany and the eurozone tipping into recession.
Will US Retail Sales Lift Dollar?
The dollar advanced moderately in the previous session amid growing fears of a global recession. Dismal data from China and Germany the world’s second and fourth largest economies unnerved investors. The dollar is the reserve currency of the world; in times of economic or political insecurity investors often look to buy into the dollar as a safer option.
However, the dollar’s rise was limited. This is because concerns are also growing that the US — Sino trade dispute is hitting the US economy, causing it to slow. A slowing US economy could mean that the Federal Reserve will look to cut interest rates again in the coming months.
Today dollar investors will be watching the release of US retail sales. Analysts are predicting that US retail sales increased a respectable 0.3% month on month. Dollar investors are particularly sensitive to signs of slowing growth, given heightened recession fears; should retail sales print weaker than forecast, the dollar could fall.
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