The euro US dollar was trading within a familiar range on Wednesday. The pair rallied to a peak of US$1.1060, before easing back to US$1.1030 and then rebounding higher once again.
The euro came under pressure in early trade on Tuesday, as inflation in the eurozone slowed to a three-year low in September. Inflation, as measured by consumer price index (CPI) ticked lower to just 0.8% year on year, down from 1% in August. The reading was also below the 0.9% that analysts had pencilled in and well short of the European Central Bank’s 2% target. With eurozone inflation stagnating, fears of an economic slowdown increased.
Price pressure in the bloc has remained stubbornly low. The ECB eased monetary policy by cutting interest rates and restarting its bond buying programme last month. It remains to be seen whether the ECB’s action will help boost the economy and inflation. Investors are doubtful at the moment and are assuming that more action will need to be taken by the central bank. As a result, the euro fell from earlier highs.
| 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. |
Trade Tensions & Retail Sales
The dollar initially edged higher in early trade on Wednesday, as investors grew nervous over escalating tensions between the US and China. Reports suggest that the trade war is far from over. Relations between the US and China have soured once again as the US House of Representatives approved three bills supportive of Hong Kong protesters. The move has angered China, elevating tension between the two powers. In times of elevated geopolitical tensions investors buy into the dollar owing to its safe haven status.
The dollar has been unable to hold onto those gains following disappointing retail sales data. Retail sales declined -0.3% month on month in September, down sharply from 0.6% gains the previous month. This was the first decline in seven months suggesting that consumers, the central pillar to the US economy, could be starting to become shaky. The weak results boosted fears that the US is heading towards an economic slowdown. As a result, the dollar declined.
| 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. |
