Exchange rates determine the worth of a domestic currency in foreign currency. Exchange rates can be termed as the price that is charged to purchase another currency. In a global market, currencies float against each other with the fluctuations depending on a variety of factors such as interest rates, economic activities, among others. The paper aims to discuss how the exchange rates have changed for the past three years relative to the U.S. dollar using Euros. The paper will also analyze the effects of the exchange rates on the economic activities domestically.
Between the years of 2017 and today, the average annual Euro to U.S. dollar exchange rate has been changing significantly. Between 2017 and 2018, the euro to the U.S. dollar exchange rate increased from 1.13 to 1.18, which meant that one Euro could purchase 1.18 U.S. dollars in 2018. By the year 2019, the value reduced overall to a value of 1.12, meaning that one euro could only buy 1.12 U.S. dollars. The exchange rates have been decreasing further from December 2019 to February 2020 from 1.12 to 1.1, meaning that in February 2020, one Euro could purchase 1.1 U.S. dollars (Cherowbrier, 2020).
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Changes in the exchange rates affect the employment of a country. When exchange rates increase, the growth of GDP is slow since the exports reduce while the demand for imports increases. With reduced GDP, investments reduce, leading to businesses closing down or reporting reduced profits. Companies tend to lay off some workers or all of them in the case where it shuts down hence unemployment. The demand for goods and services also reduce since the consumer income reduces with the unemployment levels increasing. According to the economics of demand and supply, when demand rises, the prices tend to increase, and in return, the value of the currency increases ( Choudhri & Hakura, 2006) . A country whose demand for goods is high has higher exports than imports which increases the demand for its currency and hence the higher exchange rate
References
Cherowbrier, J. (2020). Euro (EUR) to the U.S. dollar (USD) monthly exchange rate from January 2014 to February 2020. Statista. https://www.statista.com/statistics/438061/euro-to-us-dollar-monthly-exchange-rate/
Choudhri, E. U., & Hakura, D. S. (2006). Exchange rate pass-through to domestic prices: does the inflationary environment matter?. Journal of International Money and Finance , 25 (4), 614-639.
