The EURUSD Currency Pair
The eurozone and the United States, each taken as a whole, represent the two largest economies on the planet. As large economies, they share many similarities. However, because of the differences in their constitution and management, their currencies can move in differing directions that favour the possibility for traders to take positions in them and make profits.
The sheer size of the economies involved means that the EUR/USD trade customarily presents some of the largest volumes of trading daily. At the time of writing, it was the most frequently traded pair according to the Bank for International Settlements' foreign exchange surveys, representing approximately 25% of all trades.
The euro is the official currency of the European Union, which is made up of 28 nations. Of these, 19 have met the requirements for participating in the euro-area monetary union, known informally as the eurozone. These countries include: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Previously, all of these countries had used their own national currencies.
Since its launch in 1999, the euro has traded at rates between 0.82 and 1.58 per U.S. dollar. Following its initial launch, the euro showed strength against the dollar amid optimism that the euro region would prove to be a counterweight to the U.S. economy and consolidating engine for growth.
The factors that affect the value of the dollar and the euro in global trading are well known. As with many currencies, these include the results of national accounts such as GDP, the balance of payments, inflation and interest rates.
However, as the eurozone is a grouping of a disparate nations, the value of the euro can also be influenced by international political and economic factors within Europe. Those factors can be more complex than those facing single-nation currencies.
The eurozone, while a monetary union, is not a fiscal union. Although the region's monetary policy is controlled by a single central bank, the European Central Bank (ECB), each nation in the region continues to control its own national budget policy. This further means that the ECB has less direct influence over factors such as government spending, tax collection, production and employment in each of individual nations that make up the eurozone, and that it faces greater difficulties for administering its monetary policy than other central banks.
As a result, at some points in its relatively short history, the euro has faced existential crises that have prompted opportunities for traders to speculate both in favour and against the currency's value. They have also asked questions about whether the currency can remain viable in the long run.
Among the most notable of these events has been the Greek debt crisis. In the wake of global financial turmoil in 2009, less than 10 years after the launch of the euro, founding eurozone member Greece announced that it had been under-reporting its budget deficit. It also revealed that the shortfall had reached 12.9% of GDP, more than four times the eurozone's recommended limit of 3%. The revelation prompted a wave of investor risk aversion, a selloff of the European assets, a wave of negotiations for debt bailouts and speculation that Greece could be forced to leave the eurozone and return to its original national currency, the drachma.
Initially, the situation prompted selling of the euro, as investors feared that the Greek debt problems could contaminate the eurozone's wider economy. Worse, the prophecy appeared to be self-fulfilling, as investors began to scrutinise the accounts of other eurozone nations that also had signs of budget imbalances—Spain, Portugal, Ireland and Italy, among them. This brought worries that they could succumb to a domino effect.
Since the 2009 global financial crisis, the dollar has appreciated to some highs against the euro amid growth and monetary policy tightening in the U.S. While the euro has generally traded stronger against the dollar, some analysts foresee that the two currencies could trade near parity as the ECB eases its own monetary policy in an attempt to revive the competitiveness of the European currency and economy.
- Currency overview: The euro is the official currency of the European Union. It has the largest circulation among currencies in the region and serves alongside the U.S. dollar and the Japanese yen as a major world reserve currency.
- Central bank: European Central Bank
- Currency code: EUR
- History: The euro was introduced in 1999 as the official currency of the eurozone, replacing the traditional currencies of 19 nations in the region.
- Economy: The eurozone economy is the largest economy of a supra-national economic bloc in the world, with a GDP of approximately €15 trillion.
- Currency subunits: 1 cent = 1/100 of a euro
- Denominations: Bills: €5, €10, €20, €50, €100, €200 and €500; Coins: 1c, 2c, 5c, 10c, 20c, 50c, €1 and €2.
- Countries and territories using the euro: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Also, Andorra, Monaco, San Marino and the Vatican use the currency under an agreement with the European Union. Two other countries, Kosovo and Montenegro, have adopted the currency unilaterally without an agreement.
- Currencies pegged to the Euro: Benin franc, Bosnia and Herzegovina mark, Bulgaria lev, Burkina Faso franc, Cameroon franc, Central African Republic franc, Chad franc, Denmark krone, Equatorial Guinea franc, Gabon franc, Guinea-Bissau franc, Ivory Coast franc, Mali franc, Niger franc, Republic of the Congo franc, Senegal franc and Togo franc.
U.S. Dollar (USD)
- Currency overview: The U.S. dollar is the most widely used currency around the world and considered a reserve currency for most central banks. Global commodities prices and trade statistics are usually expressed in dollars.
- Central bank: The Federal Reserve System
- Currency code: USD
- History: The dollar was launched in 1792 as the official currency of the U.S.
- Economy: The U.S. economy is the largest single nation economy in the world with a GDP of US$17 trillion.
- Currency subunits: Cent (¢) = 1/100 of a dollar
- Denominations: Bills: $1, $2, $5, $10, $20, $50 and $100; Coins: 1¢, 5¢, 10¢, 25¢, 50¢ and $1
- Countries using the U.S. dollar: United States and territories, Caribbean Netherlands (Bonaire, Saba, Saint Eustatius), Ecuador, El Salvador and Panama
- Currencies pegged to the U.S. dollar: Bahrain dinar, Cuban peso, Djibouti franc, Eritrea nafka, Jordan dinar, Lebanon pound, Oman rial, Panama balboa, Qatar riyal, Saudi Arabia riyal, United Arab Emirates dirham and Venezuela bolivar.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…