How does the currency affects?

For example EUR/USD. If Euro economy going really good, does that mean the price for for euro will be more expensive? (u have to pay more $ for Euro).
And the US economy going good does that mean euro will be cheaper? (u have to pay less $ for Euro).
Have I understood this correct?
If not, can you explain beginner friendly how it works :slight_smile:

It mostly depends on the interest rate that a certain currency has. In theory, if USD has 2% interest rate and Euro 1% the USD will be stronger since many investors will be selling their Euros to buy Dollars and earn an extra 1% on their money. Again, this is in theory. Also, if a central bank starts printing money (Quantitative Easing, LTROs and such), the currency from that bank will lose value since there are more of that currency out there in the market.

Not necessarily.

If the economy in, say, a Euro region country is growing, it will normally mean that its services and products are also being exported to other countries or regions. If the buyers of these services and products are based in non-Euro regions, or the products are priced in a currency other than Euro, e.g. USD, then either the buyer will buy euros to pay for them or the seller, who receives payment in USD, will then convert them into Euros. Both of these put upward pressure on the value of the Euro.

However, some of the foreign income generated in this way is offset by increased imports resulting in an opposite pressure on the Euro.

But exchange rates are not only about trade between countries. Currency flows are also affected by investment returns in different regions. For example, if there is a higher rate of interest from, say, USD investment instruments then international funds will tend to home towards them. In addition, Central Bank policies and other economic factors such as inflation will affect currency movements.

On top of that, it is worth remembering that there are two different types of foreign exchange activity: There is the “real” market where actual currencies are bought and sold and moved for one bank account to another in order to pay for something. Then there is the “air” forex market where traders take speculative views on the direction of rates but do not actually buy or sell anything at all! This market is more concerned with what might happen in the future rather than what is happening right now. And this speculative approach can cause market reactions totally different to what one might expect and is the reason behind the phrase that something is “already priced into the market”.

Changes in economic strength and trade levels [I]do [/I]affect exchange rates, but the impact can often be seen in months and years rather than days and weeks and might be quite erratic. Economic data is also sometimes contradictory and unclear and subject to later revisions such that the actual state and direction of an economy at any point in time is often uncertain.

This is a very simplistic view of a very complex interaction of many factors!

I have used and made transaction in both the Euro and the US dollar as i am in the property business so i have many clients who are willing to buy who are from abroad and this way they convert their US Dollars into the Euros :slight_smile:

In general what you are saying is correct but then from the point of Speculative based trading the rates will move according to the sentiments of the Global traders :smiley:

Hey there! I suggest you head on over to our School lesson on Fundamental Analysis for more info on how economic data affects currency price action and price levels: Fundamental Analysis Archives

I think you’re right but only a part since it’s not easy to determine how eu or us economies get stronger against other. But you’re on the right way, just follow the calendar news and relevant articles, you would know how currencies get affected by economic news.

I think a few traders on here need to study at the pipschool. Its not as simple as strong economy = currency rises

The replies above are quite complete. I’d just suggest that you look at the AUD and NZD to see how interest rates affect their parings with the USD.

Thank u, thank u. Fantastic good answers! such a good forum!