Weaker than forecast US data and the US House launching a formal impeachment investigation into President Trump sent the euro US dollar exchange rate northwards on Tuesday. The euro US dollar exchange rate rallied to a peak of US$1.1024. However, the pair has slipped back to $1.10 in early trade on Tuesday.
The euro found some support from better than forecast German sentiment data on Tuesday. The German IFO survey showed that German business climate improved in September. The headline index came in at 94.6, slightly up from August’s 94.3. Following the release, the euro advanced.
However, the move higher was short lived. As the IFO itself pointed out, the data doesn’t indicate a new trend, only that the “slowdown is taking a break”. The broad expectation by business and market participants is that Germany is teetering on the brink of recession.
A lack of high impacting data from the Eurozone means that the common currency is now trading at the will of the dollar.
Trump in Trouble
The dollar was out of favour in the previous session after disappointing data and amid the launching of a formal impeachment investigation into President Trump.
US consumers have remained resilient, with few signs of the US manufacturing slump spilling over into the US service sector. However, Tuesday’s US consumer confidence figures unnerved investors.
US consumer confidence experienced its largest drop in 9 months in September and the largest shortfall relative to analysts’ expectations since 2012. The US economy needs a positive consumer to prop up the economy. Signs that the US consumer is less positive about the outlook could indicate that an economic slowdown is on the way. The weak data weighed 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.|
In addition to weak data, dollar investors also grappled with heightened domestic political risk. US House speaker Nancy Pelosi accused President Trump of enlisting a foreign power to help him win the 2020 elections. She will launch a formal impeachment investigation into Trump. Investors don’t like uncertainty. An impeachment trial brings uncertainty, as a result the dollar slipped.
However, the political drama didn’t end there. The dollar is finding support in early trade on Wednesday as investors react to reports that President Trump criticised China in a United Nations speech, sparking concerns that relations between the worlds largest two economies were worsening. This has triggered a fresh wave of risk aversion. When geopolitical risk increases investors tend to buy into the safe haven dollar, lifting the greenback.
|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.