How and Why the US Dollar Is Falling Against the Euro

By, 18 Sep 2017
US dollar goes downd
The US dollar has recently dropped to 12-month lows against the euro (photo

The US dollar has recently dropped to 12-month lows against the euro. As a result, the EUR/USD is enjoying a massive rally. This upside trend has been in place since the beginning of the year. Although the pair is trading at its highest level since 2015, the trade is accelerating higher. There are several reasons that this popular currency trade should continue its bullish trend.

Derailment of the Trump Train

While the election of Donald Trump caused an initial rally in the dollar, his recent policy failures have negatively affected the dollar. Many believed that he would have difficulty achieving all his promises. The White House’s recent troubles with personnel issues along with failing to repeal “Obamacare” and passing tax cuts have sent the dollar lower against most major currencies. Political gridlock should keep pressure on the greenback.

European Politics

The continent has shrugged off any feared consequences of the Brexit vote. The common market is more stable economically that it has been in the recent past. The election of Emmanuel Macron as president of France, Europe’s largest country, was positive sign for the euro. In Germany, Angela Merkel holds a commanding lead in the polls. Her re-election will be seen as a continuation of current policies that have underpinned the European currency. Her major rival, Martin Schulz is also pro-European.

Draghi Is Not a Dove

Recent actions and policy statements from the European Central Bank (ECB) and the U.S. Federal Reserve have worked to strengthen the European currency and weaken the US dollar. Although ECB wants a weaker euro, statements by central bank President Mario Draghi indicate that quantitative easing is ending. While Fed watchers talk about a number of future rate hikes, currency traders do not believe this will happen. These policy decisions and market forces are the primary drivers of EUR/USD exchange rates. Draghi and Fed Chair Janet Yellen are unable to stop it.

European Growth and Inflation

Although U.S. economic growth has accelerated lately to 2.6 percent on annualized basis, it is just now matching that of the European economic zone. Inflation in the common market is lower than it is in the U.S., especially core inflation. Although prices are beginning to tick up in Europe, the inflation picture on the continent is better than that in the U.S. where deflation pressures are still present in the American economy. This casts doubt on future Fed rate hikes. While having a weaker effect in recent months, these factors remain relevant in causing the European currency to gain strength against the dollar.

USD/EUR chart
USD/EUR exchange rate went down from 0.9442 to 0.8372 in last 6 months ( chart)

The EUR/USD exchange rates should keep moving higher on the back of a weaker dollar. The main factors are political tensions, such as the ongoing investigation related to possible Russian interference in the election, and central bank policies. While the ECB’s moves are in front of it, the Fed will most likely be on hold. Growth is better in Europe and the Trump reflation trade in not panning out. This should mean more strength in the EUR/USD exchange rate.

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