The dollar dropped sharply in the previous session following the release of US manufacturing data. The euro US dollar exchange rate pared earlier losses on Tuesday to finish the day 0.3% higher at US$1.0934. The pair is edging lower in early trade on Wednesday.
The euro is back trading above US$1.09 despite weak inflation readings from both Germany and the eurozone earlier in the week. The euro slipped to a 28-month low versus the dollar on Tuesday after eurozone inflation declined to just 0.9% year on year in September, below the 1% that analysts had forecast. The weak inflation figures from the eurozone and from Germany have left investors assuming that the European Central Bank (ECB) could ease monetary policy further in an attempt to boost inflation. Just last month the ECB cut interest rates and restarted its bond buying programme.
| 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. |
There is no high impacting eurozone economic data to be released today. Instead investors will look ahead to tomorrows’ eurozone retail sales figures. Any signs of a weaker consumer could weigh on future inflation expectations and drag the euro lower.
Dollar Under Pressure As US Recession Fears Grow
The dollar plummeted in the previous session following the release of the US ISM manufacturing numbers. The data showed US manufacturing output fell to 47.8; its second consecutive month in contraction and the lowest level output in a decade. Economist had expected activity to have increased back into expansion.
Delving deeper into the numbers, the new orders and employment components of the report pointed to broad based weakness, as the US — China trade dispute and slowing global trade impacts on the sector. The data has bolstered fears of a US recession and is forcing investors to assume a higher probability of the Federal Reserve cutting interest rates again this year.
Today investors will look ahead to US ADP private payroll report. Market participant watch this figure closely as it has a strong correlation to the US non-farm payroll report, released on Friday, the most anticipated data release of the month. A weak reading today could raise concerns over the health of the US labour market and further increase recession fears.
| 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. |
