The euro has clawed back earlier losses versus the dollar and is pushing higher as US recession fears grow. The euro US dollar exchange rate rebounded off a nadir of US$1.0904 before extending to US$1.0950.
The euro is advancing on Wednesday even as the World Trade Organization (WTO) will rule on the level of punitive tariffs that the US can apply to a range of European goods. This comes following a ruling by the WTO that the EU failed to withdraw billions of dollars in illegal subsidies to Airbus for the development and launch of the A380 superjumbo and the A350.
The US is looking to impose tariffs in the region of $11 billion on European goods in a move that would damage already very fragile EU — US trade relations. Data earlier this week has shown that the eurozone economy is potentially heading towards a recession. Any trade tariffs could only make the situation worse. This would be bad news for the euro.
The euro could continue to climb higher tomorrow as euro investors look ahead to eurozone retail sales data. Analysts are predicting that retail sales increased 0.3% month on month in August, up from a -0.6% decline the previous month. Annually analysts are forecasting a 2% year on year increase, down from 2.2% in July. Investors will be watching closely to see whether the slump in the eurozone manufacturing sector is spilling over into the consumer sector.
Dollar Drops As Private Sector Hiring Falls
The dollar fell sharply again in early trade following the release of disappointing ADP private payroll data. The report showed that private payrolls increased by 135,000 in September, whilst August’s reading was revised lower by 38,000 t0 157,000. The monthly average is now at 145,000, down from 214,000 a year earlier. The figures clearly indicate that the pace of hiring has slowed; demand for hiring has weakened.
Weaker hiring figures combined with yesterday’s dismal manufacturing numbers are unnerving investors. Fears are growing that the US could be heading towards a recession. Investors are starting to reassess the probability of the Fed hiking cutting rates again this year which is pulling the dollar 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. |
Investors will now look ahead to the US service sector figures. The service sector accounts of over 77% of economic activity and so is the dominant sector. Analysts are expecting a decline in activity to 55 in September from 56.4. Additional weakness could send the dollar lower.
| 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. |
