MARKET ACADEMY
Read pair direction, exchange arithmetic and the distinction between hedging and prediction.
Read pair direction, exchange arithmetic and the distinction between hedging and prediction.
EUR/USD = 1.10 means one euro buys $1.10: EUR is the base and USD the quote currency. A rise to 1.20 means the euro strengthens against the dollar. USD/JPY uses the opposite dollar convention: a rise means dollar appreciation against the yen. Always identify the pair before saying the dollar rose. Currency indices summarize a basket and can move differently from an individual pair.
Currency prices reflect relative policy expectations, growth, inflation, external balances, risk demand and capital flows. Higher expected domestic rates may support a currency, but the reason for higher rates matters: compensation for inflation or default risk can coexist with depreciation. An expected rate increase may already be priced in. Spot exchange rates, forward rates and interest differentials are connected, but a forward rate is not a guaranteed forecast of future spot.
For a euro investor holding a dollar asset, the euro value equals dollar value divided by EUR/USD. A stronger euro reduces the euro value of an unchanged dollar asset. Hedging can reduce a specific FX exposure using forwards or other instruments, but introduces costs, collateral requirements or residual basis risk. ECB reference rates are daily informational observations, not executable dealing quotes.
Dollar asset value is held constant. Moving the exchange rate isolates the currency effect.
EUR value of USD asset = USD asset value / EUR/USDHypothetical $1,100 asset: at EUR/USD 1.10 it is worth €1,000. At 1.20, with unchanged dollar price, it is worth €916.67 (−8.33%). Currency effects can reverse or amplify local-market returns.