After falling in the previous session, the euro US dollar exchange rate is edging lower again in early trade on Wednesday. The euro US dollar exchange rate remains below US$1.1100.
|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.
Concerns that Germany was heading towards a recession weighed on demand for the euro in the previous session. Data confirmed that the German economy contracted -0.1% in the second quarter of this year compared to the first. The figures showed that declining exports wee responsible for the German economic slowdown as the exporter nation remains caught up in the ongoing US-Sino trade war. Exports fell by more than imports wiping 0.5% off overall economic growth. Business sentiment indicators are also dropping, pointing to a gloomy outlook for the country.
Today the focus for euro traders is firmly on Italy. Today is the deadline for talks to form a new government. The 5 Star Movement and centre-left Democratic party have been trying to create a workable coalition following the collapse of the Italian government last week. These two parties have been bitter enemies until a few weeks ago.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
Failure to form a new government will mean that Italy, the eurozone’s fourth largest economy will head back to the polls for fresh elections just as the budget will need to be agreed and approved. Given Italy’s large debt piles and Matteo Salvini, the most popular politician’s desire for extra spending, euro investors are getting nervous.
US Consumers Unaffected By US — Sino Trade Dispute So Far
The dollar advanced versus the euro in the previous session after data showed that US consumers remained confident despite the ongoing trade dispute with China. Consumer confidence remained buoyant at 135.1, well above the 129 level that analysts had predicted. This shows that the slump in the US manufacturing sector hasn’t yet spilled over into the dominant service sector. This is good news for the US economy.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
Today the dollar is extending its gains versus the euro as trade concerns return to the forefront of investors’ minds. Whilst US — Sino tensions appeared to ease post G7 according to Trump, the fact that China is sending out different messages is unnerving investors. Demand for the dollar is increasing as investors look towards its safe haven properties.
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