Dollar Lower Against Euro as Federal Reserve Sounds Cautious

The euro is slowly climbing higher versus the US dollar on Friday. The pair is currently up 0.1% on the day, its fourth straight session of gains. This puts the euro US dollar exchange rate on track for a 0.8% weekly gain versus the dollar. This will be the third straight week of gains.

The euro advanced across the week, but most notably yesterday on the back of Brexit deal news. The euro climbed 0.4% versus the dollar in the previous session, following the announcement of a Brexit deal. The pound is the obvious winner from a Brexit deal, given that a Brexit deal would be beneficial to the UK economy. A Brexit deal is also beneficial to eurozone economies as it reduces uncertainty and risk. Therefore, the euro rallied when the deal was announced.

Gains have slowed today because doubts are forming as to whether Boris Johnson will be able to push the Brexit deal through Parliament. The Northern Irish Democratic Union Party, who helps prop up the government have already said that they won’t support the deal.  Should Boris Johnson fail to convince enough MP’s to support the agreement, the euro could fall at the start of the new week.

Dollar Shrugs Off Chinese GDP Data

Dollar investors shrugged off dismal Chinese GDP data. Figures showed that the Chinese economy grew at 6% in the third quarter. This was down from 6.2% in the second quarter and the lowest reading in almost 30 years. The weak figures highlight the impact that the US — Sino trade dispute is having on the world’s second largest economy.

Usually weak Chinese data injects fear into the market which boosts the US dollar, thanks to its safe haven status. Instead, today, dollar investors have shrugged of the news, possibly thanks to significantly better than forecast Chinese industrial production.

US dollar investors will now look towards Federal Reserve policy makers’ speeches. When New York President John Williams spoke earlier this week he expressed satisfaction with the state of the US economy. He was reluctant to cut rates again. Today his colleagues Esther George, Robert Kaplan and Vice Chairman Richard Clarida will give their opinion. Any hints of a more dovish stance could drag on the dollar.


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.



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.


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