The euro US dollar exchange rate dipped below US$1.1100 on Monday as the dollar strengthened, and the euro weakened. The pair is moving cautiously higher 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 was broadly out of favour in the previous session, as investors digested yet more gloomy data from Germany. The German IFO business climate index fell to its lowest level in 7 years. Business confidence dropped as the exporter country remains caught up in the ongoing US — Sino trade dispute. The fact that last week saw both the US and China increase tariffs in the tit for tat trade war suggests that the gloom may not be lifting anytime soon. The weak data from Germany, indicates that Europe’s largest economy could be heading for a recession in the third quarter after a contraction in the second quarter.
Today investors will be looking at German GDP data, the final reading for the second quarter. Analysts are not expecting a revision with a -0.1% contraction quarter on quarter pencilled in. With eurozone economies weakening, investors are increasingly expecting the European Central Bank (ECB) to loosen monetary policy when they meet in September either by cutting interest rates, through bond buying or some other method.
|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.|
US Consumer Confidence UP Next
The dollar moved higher in the previous session after strong US economic data and amid hopes of the US and China resuming trade talks. President Trump gave the dollar a boost after he indicated that the two powers would begin talks again, whilst China hasn’t supported his comments, investors are willing to give Trump the benefit of the doubt. This was encouraging news given that both the US and China levied tariffs on imports from the other last week.
Investors and economists alike are growing increasingly concerned over the impact of the ongoing US — Sino trade dispute on the US economy. Any signs that tensions could be easing would be beneficial for the US economy and therefore boosts the dollar.
Today dollar investors will be looking at US consumer confidence data. Analysts are predicting that consumer confidence slipped in August to 129 down from 135.7 in July. Any indication that the trade dispute is spilling into the consumers sphere could weigh on demand for the dollar.
|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.|
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