The most traded currency pair in the world is arguably the EUR/USD. The EUR/USD exchange rate can simply be described as the value at which the global demand for US dollars is matched by the global supply of euros. There are many factors that affect the exchange rate between these two major currencies.
Key Economic Fundamentals
The most important are the four fundamental determinants and these are:
- Differentials of real international interest rates
- Comparative prices of the non-traded and traded goods
- The price of key commodities, precious metals, and real oil prices
- The relative fiscal positions of the US and the Euro zone
Nominal Bilateral Exchange Rate
The Euro zone conducts lots of trade with the US and while this bilateral trade is important, the Euro zone’s trade with the UK is of more importance to the Europeans. For this reason, the euro and the dollar are strongly predisposed to run together in the short term.
However, there are usually some discrepancies cropping up occasionally such as the strong dollar appreciation against the euro in 2003.
In the long run, the two currencies share a great deal of similarities. The very similar inflation levels for the euro zone and the US forfeits the need to make any inflation adjustments or differentials to arrive at the effective real exchange rate. The more important factors to look at are cost developments and relative price.
Trade-Weighted Dollar Average
The US dollar is significantly affected by trade adjustments due to a combination of economic factors that have led to a decade-long fall in dollar values. This has been characterized by rising inflation levels, the US mortgage crisis, and a steady value decline against major currencies such as the GBP, AUD, CAD, and EUR.
Economic information and reports in the US and the Euro zone are very strong factors that affect the exchange rate between the two currencies. Reports touching on inflation rates, unemployment rates, GDP, consumer activity, manufacturing activity, trade balances, and bank interest rates have a direct influence in the fluctuation of the value of these two major currencies.
The greatest determinant of exchange rate values between the EUR and the USD is the confidence level of investors in each of the currencies relative to each other. Traders make their transactional decisions based on their expectations on future currency price performance.
All world currencies are affected by the stability or instability of their respective governments and the public/investor anticipation of new governments. The political activities of the euro zone and the US directly affect EUR/USD exchange rates.
However, these two being major economic powers means political turmoil in other parts of the world has an effect on their exchange rates. For instance, given the expansive level of US investment in the Middle East, turmoil in the region may result in the weakening of the US dollar against the euro. Since you’ve learned how this works you probably want to try out couple of trades yourself. Well with Juno markets opinions registering is fast and easy and you could be trading in minutes. They are reliable and well established in the industry and will offer you a demo account for you to train forex trading first.