Treasury and Risk Management: Euro/USD Exchange Rate Analysis

This report examines the factors influencing the Euro/US Dollar (EUR/USD) exchange rate, focusing on a specific period. It analyzes the impact of interest rate policies from the Federal Reserve and the European Central Bank, highlighting how these policies, along with economic indicators like employment rates and GDP, affect the currency pair. The report discusses the sensitivity of the exchange rate to factors such as political developments and inflation readings. It also considers the role of international borrowing and debt issuance in influencing the EUR/USD exchange rate. Furthermore, the report provides a chart illustrating the movement of the two currencies over a six-month period and concludes by emphasizing the multiple economic factors affecting the EUR/USD exchange rate, including policy decisions and their impact on key economic indicators.

Running head: TREASURY AND RISK MANAGEMENT
Treasury and risk management
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Answer to question 3:
Introduction:
The report is prepared analyze the reasons associated with recent spike in exchange
rate of Euro against the US dollar. Discussion incorporates the fundamental impact on the
most traded currency pair in the world. This exchange rate witnessed sudden surge during
overnight trading as on 3rd April, 2015. The fall and rise of exchange rate of euro is
repeatedly associated with global risk aversion.
Discussion:
Reasons impacting the exchange rate of Euro versus US dollar:
An insight day was charted and it has shot at higher level overnight. The technical
indicator relative strength index has confirmed the new high of the exchange rate and later on
a small pullback was indicated. One of the dominant drivers of exchange rate is the rate of
interest because they have the capability of influencing speculative flow of money and
foreign capital flows. The bottom line for Euro to dollar bulls is due to eventual rise in
interest rate. An economy witness new flows of foreign capital because of rising interest rates
and speculative money flow is attracted due to higher rates being on horizon (Patanè et al.
2017). This result in upward movement of the exchange rate as such flow of money attempt
to get ahead of the appreciation of company. From the analysis of the reason being the spike
in the exchange rate, it is ascertained that there are three factors that make the exchange rate
of EURO and US dollar sensitive such as adverse political development, readings on inflation
and policy noise of European central bank ahead of the meeting during that time (Manahov et
al. 2014).

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The interest rate policy of European central bank is one of the factors that has affected
euro. Moreover, the hike in interest rate was announced by Federal Reserve and has ceased
the purchasing of bond in late 2014. These two policies of Federal Reserve contrasted sharply
by the policy of European central bank (FXStreet 2018). All this had a downward impact on
euro relative to US dollar.
International borrowers used Euro as a funding currency in an environment
characterized by decline and low interest rate in euro area. In the first quarter of year 2015,
share of euro in international debt issuance increased by 9 percentage points. The data
regarding the exchange rate of both the currencies was confirmed by the trend of foreign net
purchases of euro area equities and net sales of euro area of fixed income assets (Bukowski
and Bukowska 2017).
Fundamental impact on the most traded currency pair in the world:
The exchange rate of Euro/US dollar influences one of the most important indicators
of economy that is interest rate. Fundamental element involved in the valuation of the
exchange rate is setting of the rate by Federal Reserve and European Central bank. In
addition to interest rate, another factor that is of fundamentally important to EURO/US dollar
is the rate of employment. It is not possible to understate the importance of rate of
employment to economy. Some of the crucial employment numbers in the Euro zone consist
of employment number of some major economies such as France and Germany. Some of
other economic releases that are considerably influenced by the EURO/US dollar are gross
domestic product, trail balance, sentiment indicators, retail sales, producer and consumer
price index. Another factor that would have significant impact on the exchange rate is
downgrading of US debt (Manahov et al. 2014).

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If the economy of US is considerably lower compared to European economy, then
exports of US will become more competitive and this would have an impact on increasing
demand of US dollar. This would make the competition of euro zone goods less competitive
and therefore, fewer imports will be preferred by US consumers.
Movement in the exchange rate of EURO/US dollar:
(Source: Ecb.europa.eu 2018)
The above chart depicts the movement in two currencies over the period of six
months. It can be seen that movement is considerably volatile in the initial months (Yong et
al. 2015). Later on, the volatility reduced.
Conclusion:
From the above explanation, it can be inferred that there are multiple economic
factors that have impacted the movement of EURO versus US dollars. The policy noise of
Federal Reserve and European Central government has considerable impact on the economic

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indicators such as employment and interest rate and they have ultimate impact on the
exchange rate.
References list:
Bukowski, S.I. and Bukowska, J.E., 2017. Financial and fiscal crises, prices and the
EUR/USD rate of exchange. International Journal of Business & Economic Sciences Applied
Research, 10(3).
Ecb.europa.eu. (2018). [online] Available at: https://www.ecb.europa.eu/pub/pdf/other/euro-
international-role-201507.en.pdf [Accessed 3 May 2018].
FXStreet. (2018). EUR USD News - FXStreet. [online] Available at:
https://www.fxstreet.com/currencies/eurusd [Accessed 3 May 2018].
Manahov, V., Hudson, R. and Gebka, B., 2014. Does high frequency trading affect technical
analysis and market efficiency? And if so, how?. Journal of International Financial Markets,
Institutions and Money, 28, pp.131-157.
Patanè, M., Tedesco, M. and Zedda, S., 2017. Dynamic Relationship of Commodities prices
and EUR/USD exchange rate trends in the recent past (No. 759). Department of Economics,
University of Siena.
Yong, Y.L., Ngo, D.C. and Lee, Y., 2015, June. Technical Indicators for Forex Forecasting:
A Preliminary Study. In International Conference in Swarm Intelligence (pp. 87-97).
Springer, Cham.