It would seem that everything is simple, keep an eye on the difference in interest rates and earn money on it, but there are no rules without exceptions, especially when central banks take up business. In the winter of 2017 – in the spring of 2018, the Forex currency market faced an inexplicable, from the point of view of fundamental laws, growth in the EURUSD rate.
Having completed the third program of quantitative easing, the US Federal Reserve, after an eight-year hiatus, began a cycle of tightening its monetary policy, starting to increase the target rate on federal funds. At the beginning of 2017, the interest rate potential between the euro and the dollar was 0.75%, in favor of the US dollar. By the summer of 2018, the difference between the rates in the dollar and the euro was already 1.75% (Fig. 3), which would inevitably lead to a depreciation of the European currency, but everything happened exactly the opposite.
In February 2017, the euro tested the level of 1.05 and was ready for a further decrease, however, despite the increase in rates in the US dollar and capital flows going to the US stock market, the euro exchange rate added 20% of the value to the US dollar in February 2018. and only then, when the Donald Trump administration launched a trade war against the European Union, did the European currency begin to decline.
Traders and investors have not been able to get an intelligible answer to the question: why did this happen? However, the most likely version seems to be that, in the face of a change in monetary policy, the Fed and the ECB, as well as the Bank of Japan, have taken joint actions to reduce the US dollar against the European currency. This version is confirmed by the fact that the futures rate of the euro exceeded the cash rate, i.e., capital flows went from the EU to the US stock market. As we already know, in this case, according to the law of supply and demand, the euro should have become cheaper, not more expensive. Moreover, at this time, it became possible to conduct risk-free arbitrage operations with US Treasury securities, which, as we know earlier, was theoretically impossible.
Such metamorphoses once again confirm the rule written by the vaporized deposits of traders and investors, stating that any transaction conducted on financial markets must be accompanied by strict observance of the principles of money management, without which the investor is doomed to ruin. Therefore, be careful and careful, observe extreme risks.