Question

Choose one major global currency among the euro, the Japanese yen, the British pound, the Chinese yuan, the Canadian dollar, the Australian dollar, the Mexican peso and the Swiss franc and explain the economic factors that have affected its price in US dollars during the past 3 months.

Answer 1

The "Euro-Dollar" exchange rate can be investigated for the last three months and the discussion on the value of the euro against the dollar is provided below.

On September 21, 2018, the EUR/USD exchange rate was 1.17756.

However, on December 21, 2018, the EUR/USD exchange rate was 1.13994.

In other words, in the past 3 months, the Euro has depreciated against the Dollar.

The reasons for euro depreciation are as follows -

1. The fed continues to pursue contractionary monetary policy with with September 26, 2018 meeting ending with the fed deciding to increase target rate for federal funds to 2.00% to 2.25%. On the other hand, the policy stance in the Euro zone remains expansionary. This is the first reason why the dollar has appreciated against the euro in the given time frame. While the fed decided to hold federal fund rates in the November 2018 meeting, the overall policy stance remains contractionary in the United States as compared to an expansionary policy stance in the Euro zone.

2. According to advance estimates, US 3Q18 GDP growth was at 3.5%. On the other hand, the Euro zone 3Q18 GDP growth was just 0.2%, which was the lowest since the second quarter of 2014. Therefore, the divergence in GDP growth is another key reason for the euro depreciating against the dollar.

3. Closely related to the GDP is the fact that the Euro zone PMI composite output index was 51.3 as of December 14, 2018. This is the lowest reading in the last 49-months. On the other hand, the US composite output index was 53.6 as of December 14, 2018. The US index is also at a 19-month low. However, on a relative basis, US continues to perform well and the PMI data indicates that the US economy is likely to be stronger than the Euro zone economy even for 4Q18. This weak euro zone growth factor is being discounted in the euro value,.

Overall, the two key factors that have translated into a weaker euro against the dollar is the monetary policy stance factor coupled with the GDP growth divergence factor. In addition to these primary factors, the uncertainties related to Brexit has also impacted the euro as compared to the dollar.