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Dollar exchange rate to euro,forex trading software comparison,currency conversions by dates,how to trade in forex market - Review>

The EUR USD exchange rate is an important indicator of relative economic health between the eurozone and the USA.
When looking at the historic EUR USD exchange rate, you can see that it has experienced huge volatility.
The crisis has broken the close correlation between differences in expected interest rates and the euro-dollar exchange rate. Since 2005, changes in expected monetary policies seem to have been the driving force behind recent exchange rate movements – at least until last year. To answer this last question we use our framework to calculate the path the elasticity to return differentials parameter should have followed to correctly simulate the observed exchange rate trajectory beginning in January 2008 (Figure 4). This exercise doesn’t say much about where the euro-dollar exchange rate will be in a year from now.
Rosenberg, Michael Roy, Exchange-rate Determination: Models And Strategies For Exchange-rate Forecasting, McGraw-Hill, 2003, Chapter 1. Smaghi, Lorenzo Bini “The euro area's exchange rate policy and the experience with international monetary coordination during the crisis”, speech at a conference entitled “Towards a European Foreign Economic Policy”, organised by the European Commission, Brussels, 6 April 2009. The chart below presents the downward trend of the Euro to USD during the past couple of weeks (UTD). The chart shows the strong positive relation between the two exchange rates; furthermore the correlation has strengthened in the past couple weeks.


The ongoing developments in Greece will plausibly keep the anxiety levels high and thus may keep the Euro weak against the USD. If the influence of differentials in expected returns on exchange rates is a decreasing function of risk aversion, a brutal increase in risk aversion will – everything else being equal – push higher interest rate currencies down against lower interest rate ones.
To find out, we constructed a simple framework to simulate the level of the euro exchange rate assuming it responds only to changes in expected return differentials, the elasticity of this response being given by a parameter inversely related to risk aversion.1 The return differential is taken as the difference in interest rates of Figure 1 plus an expected rate of change in the exchange rate (assumed to be constant over the whole period). But it tells us that expectations about monetary policy differences will regain traction in influencing foreign exchange markets as risk aversion diminishes.
Furthermore, if the upcoming EU reports (GDP) will be negative it could also further weaken the Euro. It argues that fluctuations in risk aversion explain the path followed by the euro-dollar exchange rate since the beginning of the financial crisis. In this respect, the bumpy road followed by the dollar against the euro during the last two years seems to be no exception. Calibrated to 2005-2007, this framework replicates the euro-dollar exchange rate well over those three years (Figure 3). If markets persuade themselves that the ECB will blink first, the euro could easily move to 1.50 against the dollar.
It gives the level of their one-year interest rate at the beginning of September 2008 and the change in their nominal effective exchange rate over the following two months.


During this whole period, wild fluctuations in risk aversion played a key role in the euro-dollar exchange rate movements.
It compares the rate of the euro in dollars and the difference in 3-month rates on the two currencies expected at a one year rolling horizon.
The relationship is clear – the higher the interest rate before the shock, the bigger the following fall in the exchange rate. So the euro-dollar rate could very well stay where it is for many more months… unless one of the factors that remained stable for the last years, all of a sudden starts to move as risk aversion just did! The significant appreciation of the low-yielding currencies – the dollar and the yen, notably – after Lehman Brothers’ bankruptcy thus seems to have been the direct consequence of a sharp increase in risk aversion.
The impact of the global crisis on risk aversion was not limited to foreign exchange markets (see Brender and Pisani 2007). But that requires that borrowing is relatively easy and that exchange rate risks (or risk aversion) are low. In a globalised world, interest rate differentials greatly influence foreign exchange markets, and one could assume that the euro and dollar forward rates capture the average levels of the relevant part of the two yield curves.



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12.10.2014 | Author: admin



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