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. If capital is allowed to flow freely, exchange rates become stable at a point where equality of interest is established. These two reciprocal forces determine euro vs. US dollar exchange rates. Various factors affect these two forces, which in turn affect the exchange rates: 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. The major stock indices also have a correlation with the currency rates, providing a daily read of the mood of the business environment. 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 such as labor 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. Confidence in a currency is the greatest determinant of the real euro to US dollar exchange rate. Decisions are made based on expected future developments that may affect the currency. Law of One Price:
Interest rate effects:
The dual forces of supply and demand
The business environment:
Stock market:
Political factors:
Economic data:
|