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U.S. DOLLAR / EURO REFERENCE RATE

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How Global Trade Balances Shape Exchange RatesIntroduction In the intricate world of international finance, exchange rates act as the pulse of global trade and economic stability. They influence everything from a nation’s export competitiveness to the purchasing power of consumers and the flow of international investments. While many factors affect currency values—such as interest rates, inflation, and government policies—global trade balances remain one of the most powerful and enduring determinants of exchange rate movements. The balance between a country’s exports and imports, known as the current account balance, directly reflects the demand and supply for its currency in the global marketplace. Understanding how trade balances shape exchange rates requires examining the interconnected mechanisms of trade flows, currency demand, investor sentiment, and macroeconomic fundamentals. This discussion will explore these dynamics in depth, analyzing the theoretical foundations, real-world examples, and long-term implications for nations and markets. The Concept of Global Trade Balances A trade balance represents the difference between a country’s exports and imports of goods and services over a specific period. Trade surplus occurs when a country exports more than it imports, indicating that foreign buyers are purchasing more domestic goods and services, thus creating a net inflow of foreign currency. Trade deficit occurs when imports exceed exports, leading to an outflow of domestic currency to pay for foreign goods and services. This balance is a key component of the current account, which also includes net income from abroad and unilateral transfers (like remittances or foreign aid). Persistent surpluses or deficits signal structural economic patterns that can significantly influence a nation’s currency value. The Link Between Trade Balances and Exchange Rates The relationship between trade balances and exchange rates is primarily governed by the demand and supply for currencies. When a country exports goods, foreign buyers must pay in the exporter’s currency. For example, when U.S. companies sell products abroad, international buyers must acquire U.S. dollars, increasing demand for the dollar. Conversely, when a country imports goods, it must sell its own currency to buy foreign currency, increasing supply and potentially weakening its exchange rate. Thus, a trade surplus typically strengthens a nation’s currency, while a trade deficit tends to weaken it. However, this relationship is influenced by numerous short-term and long-term factors, including monetary policy, capital flows, and investor confidence. Theoretical Foundations 1. The Balance of Payments Model This model integrates trade balances within the broader context of international financial transactions. The balance of payments (BoP) consists of two major accounts: Current account: Tracks trade in goods and services, income, and transfers. Capital and financial account: Records investment flows, such as foreign direct investment (FDI) and portfolio investments. When a country runs a current account deficit, it must finance it through capital inflows—borrowing from abroad or attracting foreign investments. To do so, it must make its assets attractive, often by offering higher interest rates or a weaker currency. Conversely, a current account surplus allows a nation to invest abroad, strengthening its currency. 2. Purchasing Power Parity (PPP) The PPP theory states that in the long run, exchange rates should adjust so that identical goods cost the same across countries. If one country has persistent trade surpluses, its currency may appreciate until its goods become more expensive, reducing export competitiveness and restoring equilibrium. Similarly, a deficit nation’s currency may depreciate, making its exports cheaper and correcting the imbalance. 3. Elasticities Approach and the J-Curve Effect The elasticities approach explains that the effect of a currency depreciation on the trade balance depends on the price elasticity of exports and imports. Initially, a depreciation may worsen the trade balance—known as the J-Curve effect—because import prices rise faster than export volumes adjust. Over time, as exports become more competitive and import demand falls, the trade balance improves, strengthening the currency. How Trade Surpluses Influence Exchange Rates A trade surplus reflects a situation where a country exports more than it imports. This surplus leads to an inflow of foreign currency, which increases demand for the domestic currency in foreign exchange markets. Key Effects: Currency Appreciation: Foreign buyers purchase domestic currency to pay for exports, pushing up its value. Stronger Economic Position: A trade surplus often reflects industrial competitiveness, high productivity, and robust demand for domestic goods. Capital Outflows: Surplus nations often invest abroad to balance their BoP, which can stabilize appreciation pressures. Example: China and Germany are classic examples of surplus economies. China’s sustained trade surpluses over the past two decades supported steady demand for the yuan. However, to avoid excessive appreciation that could hurt exports, the Chinese central bank has often intervened to stabilize the currency. Similarly, Germany’s strong export-driven economy supports a robust euro, even amid economic divergence within the Eurozone. How Trade Deficits Influence Exchange Rates A trade deficit indicates that a country imports more than it exports, creating downward pressure on its currency. Key Effects: Currency Depreciation: The country sells more of its currency to purchase foreign goods, increasing supply in global markets and lowering its value. Rising External Debt: Persistent deficits may force countries to borrow from abroad or attract foreign capital to finance their imbalance. Vulnerability to Investor Sentiment: A large deficit can trigger fears about sustainability, leading to currency depreciation or capital flight. Example: The United States provides an interesting case. Despite chronic trade deficits, the U.S. dollar remains strong because of its global reserve currency status and deep financial markets. This anomaly shows that while trade balances are a major driver, other structural factors can offset the expected impact on exchange rates. In contrast, countries like Turkey or Argentina, which run high deficits without strong investor confidence, often experience rapid currency depreciation. Capital Flows and the Balancing Mechanism In the modern globalized economy, capital flows play an increasingly critical role in balancing trade imbalances. A deficit nation can offset its trade imbalance through foreign investment inflows, such as FDI or portfolio investments. These inflows create demand for the local currency, temporarily supporting its value. Similarly, a surplus country may see capital outflows as it invests abroad, preventing excessive appreciation. For instance: The United States runs large current account deficits but attracts massive capital inflows from foreign investors who buy U.S. Treasury bonds, equities, and real estate. Japan, with consistent trade surpluses, invests heavily in foreign assets, which partially offsets upward pressure on the yen. Thus, the relationship between trade balances and exchange rates must always be analyzed alongside capital and financial account movements. The Role of Central Banks and Government Policies Governments and central banks frequently intervene to manage exchange rates, particularly when trade imbalances threaten economic stability. Foreign Exchange Intervention: Central banks may buy or sell their own currency in foreign exchange markets to influence its value. For example, the People’s Bank of China has often intervened to prevent excessive yuan appreciation to protect export competitiveness. Monetary Policy Adjustments: Changes in interest rates can attract or repel foreign capital, indirectly affecting exchange rates. A country facing a large trade deficit might raise interest rates to support its currency or encourage investment inflows. Fiscal and Trade Policies: Governments can also address trade imbalances through tariffs, subsidies, or import restrictions, which alter demand for foreign and domestic goods and indirectly impact currency demand. Case Studies 1. The U.S. Dollar and the Twin Deficits The United States has historically run both fiscal deficits (budget shortfalls) and trade deficits, known collectively as the “twin deficits.” Conventional theory suggests this should weaken the dollar, yet global demand for dollar-denominated assets keeps it strong. The dollar’s role as the world’s reserve currency and the depth of U.S. capital markets allow it to defy typical trade-driven depreciation pressures. 2. Japan’s Yen and Export Strength Japan’s economy relies heavily on exports, creating consistent trade surpluses. As a result, the yen often appreciates in times of global uncertainty, as investors view it as a safe-haven currency backed by strong fundamentals and external surpluses. 3. Emerging Markets and Deficit Pressures Countries like India, Brazil, and Turkey often face currency depreciation during periods of high trade deficits and rising oil import bills. When deficits widen, investor confidence can weaken, leading to capital outflows and downward pressure on their currencies. The Global Perspective: Interconnected Currencies In a highly interconnected world, one nation’s trade balance affects others. For example, if the U.S. dollar strengthens, emerging market currencies often weaken, making their exports more competitive but raising the cost of dollar-denominated debt. Similarly, the euro-dollar or yuan-dollar dynamics influence global trade flows, commodity prices, and financial stability. Moreover, global supply chains blur traditional trade balance calculations. Many countries import raw materials, assemble goods, and re-export them, making it harder to measure true trade imbalances. This complexity requires policymakers to consider value-added trade measures rather than gross exports and imports. Long-Term Implications In the long run, persistent trade imbalances can have structural impacts: Currency Realignment: Over time, exchange rates tend to adjust toward equilibrium levels that correct persistent imbalances. Competitiveness Shifts: Currency appreciation can erode export competitiveness, while depreciation can stimulate domestic industries. Global Economic Rebalancing: Trade imbalances contribute to global financial cycles—surplus nations accumulate reserves, while deficit nations accumulate debt, leading to periodic adjustments through market corrections or policy interventions. Conclusion The intricate relationship between global trade balances and exchange rates lies at the heart of international economics. Trade surpluses and deficits shape currency demand, influence investor flows, and determine the relative strength of national economies. While the fundamental rule holds that trade surpluses strengthen currencies and deficits weaken them, the modern world introduces layers of complexity—ranging from capital flows and central bank policies to geopolitical factors and global supply chains. Ultimately, exchange rates serve as a reflection of a country’s overall economic health, competitiveness, and integration with the world economy. Understanding how trade balances shape currency movements not only helps policymakers design sound economic strategies but also allows investors and traders to navigate the global financial landscape with greater insight and precision.
Education
by GlobalWolfStreet
EUR/USD - Trading Card🔶 EUR/USD Trading Card 🔑 Pivot Zone 1.17250 - 1.17550 (Key Pivot Area) 📊 Context: Bullish Primary Trend | Below Pivot | Current 1.17135 ⚠️ Key Levels: Active Supply = 1.18150 - 1.18650 Active Demand = 1.15500 - 1.15750 Halfway to Supply = 1.17900 Halfway to Demand = 1.16516 ─────────────────────────────────────────────────────── 🟢 Bullish Scenario 🔄 Bias Flip: Clear breach above 1.17550 ⚡ Trigger: Long from 1.17250-1.17550 • When price shows demand response (wick rejections/strong bounce) 🎯 T1 = 1.17900 🎯 T2 = 1.18150 🎯 T3 = 1.19068 (38% Fib Extension) ❌ Invalidation: Back below 1.17250 ─────────────────────────────────────────────────────── 🔴 Bearish Scenario 🔄 Bias Flip: Clear breach below 1.17250 ⚡ Trigger: Short from 1.17250-1.17550 • When price shows supply response (wick rejections/strong breakdown) 🎯 T1 = 1.16516 🎯 T2 = 1.15750 🎯 T3 = 1.14835 (38% Fib Extension) ❌ Invalidation: Back above 1.17550
Long
by ANROC
Expectations in the Trading ProcessExpectations shape our satisfaction and the gap between what we want and what we get. They are our mental image of future outcomes, based on past experiences and knowledge. How expectations filter our behavior: We often imagine how the market will look after a trade and try to force the outcome. We forget that even if a pattern appears identical to the past, the result is never guaranteed. 2. We start to think that the outside environment is compelled to do exactly as we expect. In trading, the one thing you cannot control or manipulate is the environment; you learn tools that help you look inwardly so you can be neutral with the market. 3. Having expectations unmet, we become emotional, and our decision-making becomes distorted. I have since learned to remind myself that I do not have control over the outcome, and it becomes easy to accept the loss. On Friday, i took a trade on Gold just after the NFP Unfortunately, that trade was a loss, about 237.00 hadn't i been able to accept any outcome i probably would have revenge traded, which can lead to an account being blown. One way to kick-start counteracting the expectation is by setting SMART goals. Setting SMART goals to replace expectations: - Setting goals becomes the bridge between mindset and method, which assists with taking the pressure off the need to win mentality and focusing on the process. I noticed that at the beginning of my journey, that is all i had expectations. i.e Every week I will make 8 per day. The issue with this is how certain am I that the outcome will favor me? Do I have concrete evidence when it comes to the market volatility? Absolutely not. Goals are structured intentions that help focus on the system that is process-driven, leading to the desired results. Going forward, I then changed from having a specific amount to saying that i will focus on executing my plan for the next 3 months consistently. Comparing the two was that with expecting to win meant i would eventually forget my rules and push to meet the target even if there are no quality setups. The goals I set helped focus more on the process than the outcome, which ultimately helps avoid overtrading. Focusing on things you can control allows you to be less vulnerable to human error. 1. Market entry - learning to wait for a confirmation and valid setups instead of predicting 2. Risk Management - if you are sweating over your trade, your lot size is probably too big. 3. Emotional discipline - the capacity to handle FOMO, fear, hesitation, and leaving money on the table. The less you try to force profits, the more consistently you start to grow because your focus shifts to what is within your control.
by hlengiengwane
EURUSD H4 | Bearish Reversal Off 78.6% Fibonacci ResistanceThe price is rising towards the sell entry, which is a pullback resistance that aligns with the 78.6% Fibonacci retracement and could potentially reverse to the downside from this level. Sell entry is at 1.1718, which is a pullback resistance that lines up with the 78.6% Fibonacci retracement. Stop loss is at 1.1776, which is a pullback resistance that lines up with the 61.8% Fibonacci retracement. Take profit is at 1.1615, which is an overlap support. High Risk Investment Warning Trading Forex/CFDs on margin carries a high level of risk and may not be suitable for all investors. Leverage can work against you. Stratos Markets Limited (tradu.com ): CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Stratos Europe Ltd (tradu.com ): CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Stratos Global LLC (tradu.com ): Losses can exceed deposits. Please be advised that the information presented on TradingView is provided to Tradu (‘Company’, ‘we’) by a third-party provider (‘TFA Global Pte Ltd’). Please be reminded that you are solely responsible for the trading decisions on your account. There is a very high degree of risk involved in trading. Any information and/or content is intended entirely for research, educational and informational purposes only and does not constitute investment or consultation advice or investment strategy. The information is not tailored to the investment needs of any specific person and therefore does not involve a consideration of any of the investment objectives, financial situation or needs of any viewer that may receive it. Kindly also note that past performance is not a reliable indicator of future results. Actual results may differ materially from those anticipated in forward-looking or past performance statements. We assume no liability as to the accuracy or completeness of any of the information and/or content provided herein and the Company cannot be held responsible for any omission, mistake nor for any loss or damage including without limitation to any loss of profit which may arise from reliance on any information supplied by TFA Global Pte Ltd. The speaker(s) is neither an employee, agent nor representative of Tradu and is therefore acting independently. The opinions given are their own, constitute general market commentary, and do not constitute the opinion or advice of Tradu or any form of personal or investment advice. Tradu neither endorses nor guarantees offerings of third-party speakers, nor is Tradu responsible for the content, veracity or opinions of third-party speakers, presenters or participants.
Short
by Tradu
The Chart Analysis Advice I wish I was given as a beginnerNo I am not a professional video maker, just a trader, so please excuse the terrible video quality! When I was learning to trade, I constantly wished I´d found someone who explained to me how trades worked and also how I could reliably take them and protect them. Unfortunately, I found most professors were super vague and didn´t know what they were talking about. With this system, while one cannot predict the future, we do have the next best thing, which is the forecast, kind of like the weather. Thanks to the algorithms then, we can prepare accordingly and set out trades to benefit us to the max while being exposed to small risks. In this video, I briefly talk about this morning´s trade and the logic behind this morning´s events. This for the purpose of studying the markets to improve. As always if you have any questions, don´t hesitate to ask
Education
by AWRSwingTrading
1
EUR/USDPossible Short Setup Setup: Previous day’s low has been broken, signaling a potential continuation. This setup offers a good risk-to-reward ratio, and as always, we trade with our edge. Entry: ~1.1634 Stop Loss: ~1.1670 Take Profit: ~1.1579 Risk-to-Reward Ratio: ~1:1.7 Note: This is a valid setup until the end of the New York session, after which we close manually if not hit. Disclaimer: Trading involves risk. This idea is for educational purposes only and not financial advice. Always manage your risk appropriately.
Short
by alisardari
2
EUR/USD LONGEUR/USD Long Setup Entry: 1.17450 Stop Loss: 1.17180 (–27 pips) Take Profit: 1.18020 (+57 pips) Technical Rationale The euro has just reclaimed a key value area and we’re seeing fresh conviction from buyers. On the 15min chart, price broke above the previous Point of Control around 1.1730, signaling a shift from accumulation into markup. Yesterday’s candle closed with above-average volume, confirming participation at these levels and reducing the risk of a false break. The Accumulation/Distribution indicator is trending higher, showing that money flow is firmly on the long side.
Long
by alisardari
EURUSDForex analysis for October 16, 2025, suggests that the EUR/USD pair has recently shown bullish momentum and staged a "Double Bottom" breakout, potentially targeting a move toward the 1.1765–1.1780 resistance area. However, some analysts indicate the pair is testing resistance and could experience a minor pullback. Long-term forecasts are more optimistic, with some analysts projecting a potential move to $1.20 by the end of 2025 due to supportive factors for the euro. For a potential entry point, some analysts suggest buying on a pullback to support levels. For example, one forecast suggests looking for an upward rebound after a test of the support level near 1.1605. Another points to the double-bottom level of 1.1544 as a key target should the price fall back. The most popular time for trading is often during the overlap of the European and US trading sessions (1 pm to 4 pm UK time), when liquidity and volatility are highest. Keep in mind that factors like French political stability, easing US rate expectations, and trade tensions can also influence the pair's movement. Disclaimer: This is not financial advice. Trading forex involves significant risk and is not suitable for all investors. You should perform your own research and analysis before making any trading decisions.
Long
by HavalMamar
EUR/USD on a path to Retest 20 day MA - But what comes next?In yesterday´s video I mentioned that price was firmly in the blue algo for buying and at the same time, at the time of recording the price was building liquidity potentially for some continuation. In today´s video we review how you could´ve traded that, however given the buying continuation, and the price neighbouring your 20 day MA, there could be some limit in regards to more buying. I´m not saying this will reverse but we have to be cautious as risk/reward get skewed and take this one algorithm or indicator at a time. Hope this video helps As always, let me know if there are any questions
by AWRSwingTrading
2
EUR/USD Short BIAS - NY Session Outlook As we head into the New York open, we anticipate potential price manipulation to the upside, targeting key liquidity pools at the Asian session high and London session high. These levels are prime draw-on-liquidity (DOL) areas where buy-side stops are likely resting, making them attractive for a pre-NY liquidity sweep. Following a potential sweep of these highs, we expect a reversal towards sell-side liquidity, with clear downside targets including the Asian low, London low, and the previous day’s low (PDL). These levels form relatively equal lows, adding confluence as a strong DOL zone beneath current price. Particularly, we have a 4-hour bullish imbalance (BISI) that remains unfilled. This imbalance aligns precisely with the 0.618 Fibonacci retracement level, marking the Optimal Trade Entry (OTE) zone within the premium array. This confluence strengthens the case for a short setup from that level, suggesting institutional intent and a potential distribution phase. Taking all of these factors into consideration : liquidity engineering, session timing, equal lows as downside targets, and the alignment of the H4 BISI with the 0.618 OTE , we maintain a bearish bias on EUR/USD for the New York session, anticipating a high-probability short opportunity once liquidity above intra-day highs is taken.
Short
by TheProfitRoomFx
EUR/USD | EURUSD Breakdown Alert: Could It Drop Toward 1.1565?By analyzing the EUR/USD chart on the 2-hour timeframe, we can see that the price is currently trading around 1.162 . If it manages to hold below the 1.164 level, we could expect further downside movement from the Euro. The next potential bearish targets are 1.160, 1.158, and 1.1565 . Please support me with your likes and comments to motivate me to share more analysis with you and share your opinion about the possible trend of this chart with me ! Best Regards , Arman Shaban
Short
by ArmanShabanTrading
19
EURUSD: Sellers in Control, Buyers Waiting for a Comeback👋Hello everyone, what do you think about FX:EURUSD ? It seems that last week was a favorable one for the Sellers. At the time of writing, EURUSD is trading around 1.162, continuing its downward momentum. Accordingly, the TVC:DXY index is showing signs of recovery, while the euro remains under pressure from internal political instability and challenges in stimulating growth. These factors have delayed the bullish outlook we previously expected for EURUSD. From a technical perspective, the pair has reversed after encountering a strong resistance zone marked on the chart. The price has broken below the trendline, with the current target aiming toward the support area to find new momentum. From there, if buyers gain enough strength, the 1.1900 level will be the next upside o From my personal view, I expect the retracement to continue in the short term, though I remain optimistic in the medium to long term. And you — what’s your view on EURUSD? 💬Share your thoughts in the comments below!
by Kevinn_Nguyen
4