After US dollars, Euro is the currency that is quite famous. It is ranked in the second position in the international liquidity. Some Forex traders from across the globe prefer this currency for trading. They are familiar with the weakness and strengths of this currency to make the most of it.
Forex market works almost the same way just like the stock market as they also go up or down based on supply and demand and these are affected by several factors.
Just like the stock market, speculation tends to either increase or decrease the value of Euro. For instance, if a trader believes that the Euro will appreciate against the U.S. dollar, then the trader will buy Euros with U.S. dollars. If the exchange rate rises and the investor thinks that the appreciation will taper off, the investor can buy U.S. dollars with the Euros that were purchased. The profit is made by the use of arbitrage: the difference between the currency exchange rate.
Interest Rate Differentials
One of the things that triggers speculation is the interest rate differentials. This is more commonly known as “carry trade”.
Carry trade is a strategy in which a trader or an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. Generally, higher interest rates attracts speculators which in effect, appreciates the currency as it creates more demand.
One example of this is the decision of the FED in the US to increase interest rates gradually. Foreign funds start to migrate their funds from emerging markets back to the US since it can provide higher interest income for them. Currently, because of the Eurozone’s quantitative easing, the Euro remains devalued until such time that the European Central Bank start tapering it off and eventually increase interest rates too.
Balance of Trade
The balance of trade is the difference in value between a country’s imports and exports. It affects a country’s currency through its effect on the supply and demand for foreign exchange.
When a country’s trade account does not equate to zero, there is relatively more supply or demand for a country’s currency. For example, in the case of Philippines, records show that its trade deficit widened 23.9% to USD 2.61 billion in March this year. This means that there are more imports than exports. Importers tend to buy the currencies of the countries where they import their products hence creating a demand which strengthens the currency of the country where they import their products.
Central Banks’ Fiscal Policies and Actions
Central banks from around the world implement fiscal policies from time to time which affects their currency and economy. For example, when a Central Bank actively purchases US dollars in an effort to strengthen the country’s currency over US dollars. This strengthens the country’s currency.
Another example is when the Central Bank implements quantitative easing by printing more money to pump prime the economy. This action usually devalues their country’s currency.
It is very important for a foreign exchange trader to be always on the loop in terms of news globally. In the case of Euro, there are sites doing the analysis for you. One of these sites talks about euro analysis and news.