As risk sentiment declined, the euro trended lower versus the dollar on Monday. The euro US dollar exchange rate dipped to a low of US$1.1014, although the pair was trading off this low at the time of writing.
Demand for the euro declined despite stronger than expected eurozone industrial production figures. Industrial production ticked 0.4% higher in August from July, ahead of the 0.3% forecast. However, it was still down -2.8% compared to the same month last year, marking it’s the tenth consecutive month of year on year decline; the longest since the financial crisis. Analysts warned that the slight rebound in monthly industrial production was nowhere near sufficient to prevent a contraction in the economy in the third quarter.
Amid growing signs of economic weakness, the European Central Bank eased monetary policy in September. Investors fear that the central bank will be forced to cut rates again.
| 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 more eurozone data to be released today. Instead the euro will move at the will of the dollar. Euro investors will now look ahead to ZEW sentiment figures tomorrow. Analysts are expecting confidence in Germany to have declined further to -26.5 as the manufacturing slump in Europe’s largest economy continues. A weak reading could fuel recession fears.
Dollar Rebounds As Trade Hopes Are Scaled Back
The dollar was back in demand on Monday, as investors took another look at last week’s agreement between the US and China. On a second assessment investors have decided that, as it stands, the deal it is nothing more than a month-long standstill agreement.
Adding to the negativity, figures from China showed that the world’s second largest economy was under strain amid the ongoing trade dispute. Exports declined -3.2% year on year in September, whilst imports were also down a massive -8.5%. Evidence of the damage the trade dispute is causing stacking up, investors want to see more progress between the US and China.
As investors reassessed the global economic picture and the chances of a successful trade deal being agreed, demand for the safe haven dollar increased.
There is no US economic data due until Wednesday. Geopolitics will remain in focus until then.
| 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. |
