The euro is the second most traded currency in the world, after the US dollar. According to the European Union on its website, at least 20 countries of the 27 that make up the political and economic association use it as their official currency. Among them, France, Italy, Austria, Portugal and Croatia.
This currency was abandoned in the financial markets in 1999, but it was not until January 2002 that the first euro coins and banknotes entered into circulation. According to Invezz’s team of finance experts, the member nations of the European Union accept the sovereignty of the European Central Bank in matters of monetary policy.
What factors determine the price of the euro?
inflation
According to an article from the specialized site ‘Investopedia’, reviewed by the finance specialist Chales Alfareros, inflation is a key factor affecting all currencies, including the euro. In economics, this concept refers to the widespread and sustained increase in the prices of goods and services in a country over a sustained period of time.
“A country with a lower constant inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies”, explains the specialized portal mentioned above. At higher inflation, nations typically tend to see their currency depreciate, and this, in turn, is accompanied by higher interest rates.
Inflation is a general increase in prices in an economy, that is, goods and services.
(Also read: The euro reaches its highest in 6 months, but falls after US economic data.)
The Consumer Price Index (CPI) is the key measure of inflation in the euro area, since it measures the evolution of the average cost of a basket of goods and services representative of final household consumption.
monetary politics
Currencies are affected by the monetary policies of your Central Bank. In the case of the euro, it is the European Central Bank (ECB), whose decisions regarding interest rates can have a significant impact.
Both interest rates and inflation and exchange rates are directly related. High interest rates attract foreign capital, offering lenders a higher return compared to other countries. This, in turn, raises the exchange rate. However, “the opposite relationship exists for falling interest rates, that is, lower interest rates tend to lower exchange rates,” says investment, finance and accounting expert Tomas Brock for ‘Investopedia’.
There are realizations between inflation, interest rates and exchange rates.
(Keep reading: British Pound: Why Is It Close to Being Worth a Dollar?)
The increase in interest rates, in turn, is related to the increase in inflation. According to the ECB, when there is a general increase in prices, they are forced to raise interest rates so that inflation returns to its target of 2 percent in the medium term. In December 2022, for example, it achieved an increase in the three official interest rates to 0.5 percent and announced another increase of 50 basis points in March 2023.
A few months ago, in September 2022, the euro reached its lowest value in 20 years, after the United States Federal Reserve (Fed) raised its interest rates by 75 basis points, according to the ‘DW ‘.
GDP and economic growth
Financial stability in the area is another determining factor when establishing the price of the euro. Foreign investors, for example, look for countries that have strong economic performance. If the nation suffers from political depression, this can cause mistrust in the currency and, in addition, generate movement of capital to other states.
In the words of Invezz: “A country with positive assets will attract investment funds, compared to other countries in which it is perceived that there is more political and economic risk.” The opposite happens when the country enters a recession, since the depreciation of the currency is present.
The price of a currency can also be influenced by the economic and political stability of a country.
(Of interest: Euro falls to new 20-year low after shift to the right in Italy).
Added to the list of factors that can determine the price of the euro is the Current Account, which is nothing more than one of the three accounts that make up a country’s balance of payments. Higher capital translates into a positive return for the coin; while a current account deficit shows that the nation “is spending more on foreign trade than it is earning and that it is borrowing capital from foreign sources to offset the imbalance.” This can inevitably influence the exchange rate.
currency supply and demand
The value of coins is mainly determined by their supply and demand in the market. Supply, on the one hand, is the product of exports and capital inflows; while demand is determined by imports and capital outflows.
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