Can We Understand Exchange Rate Euro?

Try to predict the exchange rate is difficult exchange rate euro. Understand your past behavior is not much easier. In this sense, the bumpy road, followed by the U.S. dollar against the euro over the past two years does not seem exception. However, a look at Figure 1 gives some interesting clues. Rates of the euro and the dollar difference compared to the rate of 3 months as a currency expected to tread a year.

Until last year, the two variables exchange rate euro appear to be highly correlated. This should not be a total surprise. In a globalized world, the differences in interest rates greatly influence the currency markets, and one might assume that the rate of increase of euro and dollar capture the average levels of the corresponding part of the two yield curves.

Exchange rate euro Since 2005, changes in the expected monetary policies appear to have been the driving force behind the recent movements in the exchange rates at least until last year. Next, the clear correlation breaks. But this is not entirely surprising. After all, it is expected that how interest rates affect the exchange rate exchange rate euro?

Traders borrow in currencies with low rates and lend at a higher rate. Thus, pushing the value of the first down against it. But this requires that the loan is relatively easy and the exchange rate risk (or risk aversion) are low. What if these conditions are broken exchange rate euro? Suddenly the influence of yield spreads is reduced.