The euro gained versus the dollar for the second straight session on Wednesday amid growing concerns over the health of the US economy. The pair closed 0.25% higher at US$1.0961. The euro is extending gains versus the dollar in early trade on Thursday.
The euro advanced in early trade on Thursday thanks to eurozone retail sales rebounding in August. Data published by the EU’s statistics agency Eurostat showed that retail sales increased by 0.3% month on month in August, and 2.1% compared to a year earlier. The solid readings indicate that consumer spending remains resilient in the bloc despite the manufacturing slump. This is important because a strong consumer spending could help prevent the bloc from slipping into recession, even as the manufacturing sector continues to contract.
Retail sales figures are closely watched because economists consider them to be a forward-looking gauge for inflation. Stronger retail sales figures point to higher inflation down the line. As a result, the euro advanced.
However, gains in the common currency have been limited as investors also fret over the announcement of new US tariffs on European goods. The Trump administration is taking advantage of the World Trade Organisation (WTO) ruling against the EU for subsidising the European Aviation giant Airbus. The move has angered Europe, damaging already fragile US – EU relations. Tariffs on European products could have a negative impact on business confidence and eurozone economies.
Weak US Job Creation & Manufacturing Hits Dollar
The dollar fell for a second straight session on Wednesday as US recession fears grew. The US ADP private payroll report showed that 135,000 jobs were created in September. August’s figure was revised downward by 38,000 to 157,000. The monthly average is now just 145,000 compared to 214,000 this time last year. The significant decline in hiring indicates that demand for hiring has weakened.
This, combined with the weakest manufacturing output in a decade is unnerving investors. Concerns are growing that the US could be heading towards a recession and that the Federal Reserve will need to cut interest rates again in the coming months.
|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.|
Today dollar investors will look towards US non-manufacturing pmi figures. Given the dominance of the service sector in the US economy a strong reading has the potential to calm recession fears. Equally a weak reading could send the dollar sharply 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.