International Finance Currency Trading - Term Paper Example

The paper "International Finance Currency Trading" is a brilliant example of a term paper on finance and accounting. The current exchange rate for EUR/USD is 1 Euro for 1.1285 US dollars, according to Google Finance. Figure 1 shows a graphical representation of changes in the value of the Euro over a period of one year. The graph shows a decreasing trend in the value of the Euro relative to the US Dollar with frequent fluctuations in between.

Many factors have influenced the current value of Euro which includes purchasing power parity of the Eurozone, interest rate, and inflation. The purchasing power parity theory holds that countries have equal purchasing powers when the exchange rates between their currencies are in equilibrium (Antweiler, 2011). Differences in the inflation rate and the domestic price levels impact the exchange rate. The current value of Euro relative to the US Dollar suggests that the Euro area has been experiencing lesser inflation or price as compared to the USA. This means that the Euro has been depreciating as compared to the US Dollar. Considering another variable which is the interest rate will help explain Euro’s present value. Figure 2 shows the interest rate across the Euro area over a period of one year. The graph shows that the benchmark rate has gradually dropped over the year to 0.05 based on data provided by the European Central Bank.

On the other hand, data from The World Bank shows that the real interest rate for the United States for 2013 has been 1.7 percent. The decreasing interest rate in the Euro coupled with a decreasing real interest rate in the United States explains the decrease in the value of Euro versus the US Dollar. A depreciating currency is due to a decrease in the real interest rate which means that investors are not as willing to invest because of lesser returns in the Euro area (McEachern, 2013). However, the United States also does not have a high real interest rate but is far greater than that in the Euro area.

Based on data by CME Group (n.pag.) the foreign exchange futures for Euro currency will increase over the next few years. By December 2015 the change between the prior settling value and the last value will be positive. The most important contract, in this case, is the EUR/USD currency futures contract. Liquidity plays an important role in foreign exchange futures and a EUR/USD currency future contract usually involves thousands of contracts in volume.

According to an article by Oliver Wright and Ben Chu (n.pag.), Euro does not have any future especially in the wake of the European Fiscal Compact agreement which experts say is unsustainable. The recent economic crisis in Greece and poor economic performance being shown by many of the European Union countries present a dismaying story. Hence, Euro currencies' future is not as sustainable due to the economic performance of many of the EU countries including Greece, Portugal, Spain, and so on.