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Context:

The euro is experiencing a rise against the US dollar.

Background

The euro fell against the US dollar following Trump's election because of market expectations regarding his policy agenda.

Trump's election campaign vows tax cuts, deregulation, and more infrastructure spending to stimulate US economic growth, corporate profits, and consumer spending.

Trump's protectionist trade policies prompted uncertainty in global markets, which led investors to find safe havens in the US dollar.

The EU faced political uncertainties, such as elections in member states and ongoing economic stagnation, this put additional pressure on the euro.

How do currency exchange rates generally work?

Currency exchange rates are determined by comparative demand and supply in foreign exchange markets. Several factors influence these rates:

• Higher interest rates in a country can attract foreign capital, increasing demand for its currency.
• Stronger economic performance typically strengthens a currency.
• Lower inflation tends to support currency value.
• Stable political environments attract investment.
• Countries with trade surpluses often see stronger currencies.
• Investor sentiment plays a significant role in short-term movements.

What is the outlook for the euro-dollar exchange rate?

• If the US economy slows further, the dollar may continue to weaken.
• Federal Reserve actions will significantly impact the dollar.
• EU economic reforms: Sustained commitment to growth-oriented policies could strengthen the euro.
• Resolution of trade disputes might reduce uncertainty.
• Elections and policy shifts in both regions will influence currency values.
• Investor sentiment toward risk assets will affect currency flows.

How does this currency movement impact India's economy?

• Rupee appreciation against the dollar will reduce import costs, particularly for energy imports, potentially lowering inflation.
• Rupee depreciation against the euro to benefit Indian exporters to the EU, making their goods more competitive.
• A weaker dollar may encourage foreign investment in emerging markets like India.
• Changes in euro-dollar exchange rates affect global trade patterns, influencing India's trade relationships.
• Currency movements impact global commodity prices, affecting India's import costs.

Source:

INDIAN EXPRESS

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