Law of one price: In competitive markets, free of transportation cost barriers to trade, identical products sold in different countries must sell at the same price when the prices are stated in terms of the same currency.
Interest rate effects: If capital is allowed to flow freely, exchange rates become stable at a point where equality of interest is established.
The dual forces of supply and demand
These two reciprocal forces determine euro vs. US dollar exchange rates. Various factors affect these two forces, which in turn affect the exchange rates
The business environment: Positive indications (in terms of government policy, competitive advantages, market size, etc.) increase the demand for the currency, as more and more enterprises want to invest in its place of origin.
Stock Market: The major stock indices also have a correlation with the currency rates, providing a daily read of the mood of the business environment.
Political factors: All exchange rates are susceptible to political instability and anticipation about new governments. For example, political instability in Russia is also a flag for the euro to US dollar exchange, because of the substantial amount of German investment in Russia.
Economic data: Economic data such as labour reports (payrolls, unemployment rate and average hourly earnings), consumer price indices (CPI), producer price indices (PPI), gross domestic product (GDP), international trade, productivity, industrial production, consumer confidence etc., also affect currency exchange rates.
The euro to US dollar exchange rate is the price at which the world demand for US dollars equals the world supply of euro. Regardless of geographical origin, a rise in the world demand for euros leads to an appreciation of the euro.
Factors affecting the Euro to US dollar exchange rate
Four factors are identified as fundamental determinants of the real euro to US dollar exchange rate:
- The international real interest rate differential between the Federal Reserve and European Central Bank
- Relative prices in the traded and non traded goods sectors
Understanding how much you can actually afford to invest will help you reduce your risk. When you have a budget that you’re willing to stick to, you’re less likely to throw more money into Forex to chase losses. This is what ultimately leads you to going broke, so stick with a strict budget.
Forex is one of those topics that doesn’t have a ceiling in terms of knowledge. You should always continue to learn and grow in terms of your Forex education. Subscribe to different newsletters and other sources of information to ensure you keep learning.
Did you know that most people who fail at Forex do so because they’re unaware of the many risks involved in trading? You don’t have to go down this road. You won’t even have to be baptized under fire, so to speak, if you’re willing to test different risk-management strategies before you begin investing.
Charts and graphs might make you feel like you’re back in school, but that’s a good thing. You’ll have to learn how currency pairs work against each other, in the past, the present, and hopefully in the future. Understanding how each currency stacks up is the only way you’ll be able to make an educated trade.
Today, the Forex market is a nonstop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are continually and simultaneously bought and sold across local and global markets. The value of traders’ investments increases or decreases based on currency movements. Foreign exchange market conditions can change at any time in response to real time events.
- The main attractions of short-term currency trading to private investors are:
- 24 hour trading, 5 days a week with nonstop access (24/7) to global Forex dealers.