USD EUR Currency Pair

Submitted by Marco on 31 March, 2008 - 21:29

There are four fundamental determinants to the USD EUR Currency Pair Forex Exchange Rate

Four factors are identified as fundamental determinants of the real euro to dollar exchange rate: The international real interest rate differential; Relative prices in the traded and non-traded goods sectors; The real oil price; The relative fiscal position.

The basic theories underlying the dollar to euro exchange rate:

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 determine euro vs. 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 there.

Stock market

The major stock indices also have a correlation with the currency rates.

Political factors

All exchange rates are susceptible to political instability and anticipations about the new government. For example, political or financial instability in Russia is also a flag for the euro to US dollar exchange because of the substantial amount of German investments directed to Russia.

Economic data

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 fluctuations in currency exchange rates.
Confidence in a currency is the greatest determinant of the real euro-dollar exchange rate. Decisions are made based on expected future developments that may affect the currency. A EUR/USD exchange can operate under one of four main types of exchange rate systems: