Value of Euro One Year from Now

Current exchange rate 1.2727 US dollar to 1 euro
US inflation rate 2.20%
Euro inflation rate 2.50%

According to PPP the exchange rate at the end of one year should equal
Exchange rate ((1 + US inflation rate)/(1 + Euro inflation rate))
Therefore: 1.2727(1.020/1.025)
Value of Euro One Year from Now = 1.2665

Interest Rates and central bank policies are one of the major determinants on exchange rates. We can look ahead and use anticipated policy to guess where rates will be in the future. Because of the way the euro zone is setup the ECB does not intervene in the bond markets. However a major change in economic policy by the ECB announced there would be ‘unlimited’ bond purchases for indebted nations who met certain criteria. This policy is what has served to strengthen the Euro lately. Spain will probably be forced to accept a bailout but most likely this should strengthen the Euro once it is finalized as it removes the uncertainty. The interest rate of a central bank will affect the strength of a currency. A higher or lower interest rate by the central bank will affect investor demand for a currency. ECB (European Central Bank) meets monthly to decide on changes in their central bank rate. Currently ECB has their interest rates exceptionally low to foster growth – as do all central banks. A corporation may choose to build a factory in another country that it exports its product to in order to hedge against