Do you know What is the global Forex market, Part- 3

The fall of the US dollar

The steady and orderly decline of the US dollar from early 2002 to early 2007

against the euro, sterling, Australian dollar, Canadian dollar and a few other

currencies (i.e. its trade-weighted average, which is what counts for purposes

of trade adjustment), remains significant.

In the wake of the sub-prime mortgage crises in the US, dollar losses

escalated and continued to feel the backlash. The Fed responded with several

rounds of rate hikes while weighing the balance of domestic growth and

inflation fears.

When was the last time the EUR-JPY pair was over 150.00?

(Have a look at).

Easy-Forex™ professional charts

The basic theories underlying the US 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

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 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.