EUR USD rates are said to be the subsequent price of the EUR in terms of the USD. It is also said to be the rate at which two different currencies in the forex market can be exchanged. Forex trading exchange rates shows how much of a currency can be exchanged to one unit of another currency. Most currency exchange rates are not static, they change continually with a lot of floatation and this is based on a lot of factors. However, some currency’s exchange rates are basically fixed to other currencies which brings about a tandem movement with the currencies they are paired to.
The EUR USD rate is made up of the domestic currency and a foreign currency and they can be quoted either indirectly or directly. In terms of the indirect quotation,the foreign currency is the counter currency while thedomestic currency is the base currency. In the direct quotation, the domestic currency is the counter currency and the foreign currency is the base currency. The price of a unit foreign currency is expressed in direct quotation as a domestic currency while the price of a unit domestic currency is expressed in an indirect quotation as a foreign currency.
MAJOR DETERMINANTS OF THE EUR USD RATE
Inflation is a major determinant of the EUR USD rate. Countries experiencing low inflation rates always exhibit a rise in their currency value while those that experience higher inflation rates typically sees a reduction in their currency value when dealing with their trading partners. Countries with low inflation rates include Germany, Switzerland and japan while those with high inflation rates include United States and Canada.
INTEREST RATES DIFFERENTIALS
Interest rate differentials also influencesEUR USD rate. A high interest rate gives loaners in a country’s economy a high rate of return when compared to other countries. This means that high rate of interest attract foreign capital which brings about a rise in the exchange rate while a decrease in a country’s interest rates tends to simultaneously lower the exchange rate.
ECONOMIC PERFORMANCE AND POLITICAL STABILITY
Foreign investors always seek out to invest their capital in nations with strong economic performance. Example, the Europe and the United States. These set of nations or countries tend to draw investment funds completely away from other nations with political and economic risk. Political instability leads to loss of confidence and this fails to attract investors.
A COUNTRY’S TERMS OF TRADE
A country’s term of trade is said to be the ratio that compares export prices to import prices. If the export price of a country rises to a greater length than that of the country’s imports, it shows a favorable improvement. In the EUR USD rate An increase in a county’s terms of trade shows a high demand of the nation’s exports which means rising revenue from exports and an increase in demand of that country’s currency.
In conclusion, a decrease in a currency’s exchange rates also reduces the purchasing power of capital profits and income gotten from investment returns therefore, investors should understand the role played by currency values and exchange rates in level of profit they make on each investment.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.