Inside the Currency Market: Mechanics, Valuation, and Strategies

Euro, EURIBOR, and EONIA

From an ECB and euro Governmental perspective, both would like to see cheaper borrowing costs to their currency to allow a greater demand for euro exports. Yet importers to the euro zone experience higher costs for their products due to a misalignment of rates that stems from EURIBOR and EONIA prices. EURIBOR and EONIA must be balanced against imports to exports yet all must be balanced against an ECB three-month target rate to allow inflation to remain sustained. This is Mundell-Fleming taken to the next level. The euro/U.S. dollar spot price can only fall between, above, or below these rates. Because the U.S. dollar has a direct opposite correlation to the euro, tracking the U.S. dollar for euro direction is paramount. ...