This article introduces the factors that affect the major currency pairs: the main factors of the euro against the dollar (EUR/USD).

The exchange rate of the euro to the US dollar is the market's quotation for the currency pair when the global demand for the US dollar and the global supply of the euro are equal. There is no need to disregard geographic factors. The increase in global demand for the euro will cause the euro to appreciate.

Factors affecting the exchange rate

The following are four basic determinants that are recognized as determining the real exchange rate of the euro against the dollar:

International real interest rate differential
Relative prices of traded and non-traded goods
Actual crude oil, precious metals and other commodity prices
Relative financial position
The nominal bilateral U.S. dollar to euro exchange rate is the most concerned exchange rate. Despite the relative importance of the euro to the bilateral trade ties of the US dollar, to a certain extent the trade between the euro zone and the United Kingdom is more important than its trade with the United States. The US dollar and the euro tend to be similar in short-term trends, but sometimes there are obvious differences. For example, in 2003, the strong appreciation of the US dollar against the euro is an example of these differences.

In the long-term trend, the bilateral US dollar-euro exchange rate is closely related to the different measures implemented by the euro zone effective exchange rate, which can be seen from the effective real exchange rate. Since the United States and the Eurozone have similar inflation levels, there is no need to adjust the dollar-euro exchange rate for inflation differences. However, because the Eurozone has close trade relations with countries with higher inflation (such as some countries in Central and Eastern Europe, Turkey, etc.), it is more important to lower the nominal exchange rate according to the trend of relative prices and costs.

The basic principles of the U.S. dollar to euro exchange rate are:

Single price rule: In a competitive market transaction that does not consider transportation costs, the same products sold in different countries must be sold at the same price when they are settled in the same currency.

Interest rate effect: If capital can flow freely, the exchange rate will stabilize at the point of interest balance.

The two forces of supply and demand determine the exchange rate of the euro against the dollar. Different factors affect these two forces and thus the exchange rate:

Business environment: Positive signs (such as government policies, competitive advantages, market size, etc.) have increased the demand for money because more and more companies want to invest here.

Stock market: The main stock indexes are also related to exchange rates.

Political factors: Political instability and people's expectations of the new government will affect exchange rate changes. For example, the political or economic instability in Russia is also a sign of the exchange rate of the euro to the dollar, because there is a considerable amount of German investment in Russia.

Economic data: Economic data or indicators
Such as labor report (salary, unemployment rate and average hourly wage), consumer price index (CPI), producer price index (PPI), gross national product (GDP), international trade, productivity, industrial production, consumers Confidence, etc., will also affect changes in currency exchange rates.

Confidence in the currency is the most important factor in determining the actual euro-dollar exchange rate. Decisions made based on future development expectations may also affect currency exchange rates. The exchange of EUR/USD can be carried out in one of the four main exchange rate systems:

Fully fixed exchange rate

In a fixed exchange rate system, the government (or the central bank representing the government) intervenes in the currency market to stabilize the exchange rate near an exchange rate target. It is committed to a single exchange rate and does not allow major fluctuations in the exchange rate from the center.

Free exchange rate

The value of currency is completely determined by the supply and demand in the foreign exchange market. Trade flows and capital flows are the main factors affecting this exchange rate. The performance of the floating exchange rate system is as follows: The exchange rate in the currency system is completely affected by the market and fluctuates without the intervention of the domestic government. For example, the Bank of England will not actively intervene in the currency market in order to obtain an ideal exchange rate level. Under a floating exchange rate, changes in market demand and supply cause currencies to change in value. Purely freely floating exchange rates are rare-most governments will try to "control" the value of their national currency at some point by changing interest rates and other control methods.

Managed floating exchange rate

If it is not part of a fixed exchange rate system, the government usually manages floating exchange rates. Fixed exchange rates provide importers and exporters with greater certainty, and under normal circumstances, there is less speculation—although this depends on whether traders in the foreign exchange market believe that a given fixed exchange rate is appropriate and credible.

Advantages of floating exchange rates

Exchange rate fluctuations can provide an automatic adjustment mechanism for countries with large balance of payments deficits. The second major advantage of a floating exchange rate is that it allows the government/monetary authority to control interest rates flexibly.