EUR/USD pair is the most popular trading instrument on the Forex market. But unlike the idea of foreign exchange itself that dates all the way back to ancient times, Euros to Dollars history is fairly fresh. Today we are going to learn about the making of a pair that brings Forex traders across the world the largest part of their profits.
Euro to Dollar history: the origins
Professional traders will agree that profitable trading majorly relies on the amount of knowledge. Specifically, knowledge about your preferable currency pairs and the driving powers behind their values. So, to better understand Euro to the Dollar history, it would make sense to look at how they came to exist individually at first.
Euro is a relatively young currency. EUR was established in 1992 along with the formation of the European Union. The widespread use of the currency took place nearly a decade later, 1999 through 2002. As of today, this currency is used by nineteen members of the Union, including large financial capitals, such as Germany and France.
European money is primarily driven by the ECB’s (European Central Bank) interest rate decisions and by German economic reports, including GDP and IFO. EUR is the second largest reserve currency as well as the second most traded unit on the Forex market.
USD is slightly older than its most common partner, the Euro. The Coinage Act of 1792 defined the value of the new American currency, establishing the value in gold and silver equivalents. The greenbacks we know today, with portraits of dead presidents, came into the world during the early 20th century.
The US Dollar features in nearly 85% of all foreign exchange transactions daily. And although trading with American dollar is the most logical thing to do, its analysis includes a lot of factors to be considered.
But with so many currencies around the world, how exactly did the history of Euro to Dollar become the focus of attention for thousands of traders across the globe?
Euro to Dollar history of the pair
Since we already know that Euro is roughly 20 years old, it makes complete sense that EUR/USD pair is also pretty fresh. Before the establishment of Euro, USD commonly got paired with German Mark (aka Deutsch Mark) and French Franc.
Prior to the establishment of Euro, other financial units such as ECU did the work to define the value for the next generation’s currency. We won’t go into the exact mechanics of how that happened, but it’s worth mentioning that the influence of the most economically powerful European countries was a major factor.
When Euro entered the Forex scene, USD was already the center of everyone’s attention. It was not much of a question why these two currencies quickly got paired up. The EUR/USD pair is simply representing co-dependency as well as co-influence of two most powerful economies.
But if both European and American economies are nearly equally powerful, how come their national currencies differ in value, allowing for speculation? To answer that we need to look at the factors that affected the Euro to Dollars history.
What affected the history of EUR/USD pair
Let’s step aside from discussing the full history of EUR USD, and talk about what affects the value difference in any existing currency pair. Although most traders will have a different theory about how exactly each currency’s price gets formed, it is a well known fact that the drivers of all money in the world are fundamental.
Fundamental factors include concepts that don't always directly relate to the world of finance. Any government’s economy is closely connected to the local political and social events. For example, a law that regulates immigration can result in the numbers that reflect employment rates.
However, the strictly fundamental factors, such as interest rate reports by central banks would still play the main role. The global financial crisis of 2007/2008 was a defining moment for most financial institutions across the globe.
Central banks everywhere were facing a never-seen-before scenario and had to make crucial decisions on the spot. Some of those decisions were more effective than others, although it would be fair to say that most of them proved to be very creative.
The key factor behind Euro to the Dollar history during the crisis, were differences between policies established by ECB and Fed respectively.
Why were they different?
The answer to why two of the most important central banks in the world acted differently through the crisis is their primary objectives. While ECB’s main focus is to keep the price stability, the Federal Reserve also made it their goal to both keep prices stable and ensure for the maximum employment.
If you have even the most basic understanding of economics, it is not that hard to conclude why the ECB and Fed had to act differently. Price stability is an inflation related factor which can be regulated through interest rates set high.
But the higher the interest rates are, the harder it is for banks to provide good financing deals to their clients, which doesn’t really agree with keeping employment rates at the good side. That’s why Fed took a different path in battling through instability.
How did they differ?
The Federal Reserve chose to stimulate their national economy much earlier than the ECB. By three aggressive and voluminous channels of quantitative easing (QE).
Quantitative easing is a monetary policy implemented by central banks to revive or stimulate the national economy. The way it works essentially is: the central bank allocates or creates a sum of money to purchase bonds from financial institutions, which leads to reduction in interest rates and allows a higher number of people to loan funds from banks.
The entrepreneurs are then able to borrow more and invest into their business by hiring more employees. This leads to creating more and more jobs, as well as higher spendings. Eventually, the final step of the QE theory is the boost in the economy and with it in the value of national currency.
Unlike the Federal Reserve, the ECB started buying bonds later on, which was the main reason behind two largest currencies getting a noticeable difference in values during the crisis. The EUR/USD rates, however, are not always this dramatic. Which brings us to the next segment: EUR/USD rate of exchange history rates.
EUR/USD Rate of Exchange History Rates From 2009
There were times, in October 2000 to be specific, when you could buy one hundred dollars for just 82 Euros. But as we have already learned about the events of the crisis and the measures taken by ECB and Fed. Which brings us to a sky-rocketing rate of 1.6038 back in July of 2008.
But throughout the next years Euro has slowly but surely gained its strength back. The year 2009 closed at roughly 1.43 and ten years later in 2019 we got a 1.12. This was by no means a smooth road. Some of the events managed to strengthen the Euro, while others worked against it. Here are a few:
In October 2019, the new Greek government revised the deficit forecast. This was one of the very first steps to Greece becoming a sore spot in the EU’s economy and weakened EUR against USD, resulting in a rate of 1.5006
Then on June 1 of 2011 Moody’s Investors Service downgraded Greek debt seven notches down into the junk status. The average rate of EUR/USD was around 1.43 after these events
On January 22, 2015, European Central Bank rolled out a quantitative easing which also led into the weakening in national currency. However, by the end of that very year Fed raised the interest rates for the first time since the crisis, which began the process of Euro strengthening
These are just some of the examples of how euros to dollars history of rates can fluctuate due to different factors.
Which brings us to the next portion of this review, specifically: what are the factors to consider in order to successfully analyze and predict the movement of the EUR/USD pair?
Euro to Dollar History and Analysis
If there is anything we can learn from the Euro to Dollar history, is that understanding how fundamental factors affect the price formation is crucial for successful professional trading. But in case of many traders this is easier said than done.
Technical analysis is highly popular among Forex traders because it is generally easier than the fundamental one. Comparing past data and drawing projections based on it is primarily mathematical and doesn’t really require knowledge from any other areas. But knowing the EUR/USD rate of exchange history rates is important, but it’s not always enough to build a comprehensive forecast.
There are two major reasons behind this. Number one is that while there are many traders who only use technical analysis for trading, there are a lot of fundamentalists as well. And both camps are equally capable to influence the amounts of volume and volatility at the market, which will then reflect in the value of specific currencies.
Another reason is that sometimes bigger sharks come out into the ocean of Forex and affect the events with one or two major decisions. For example, as we have previously seen, a decision by either Fed ECB can significantly affect the way events unfold at the market.
That’s why mastering fundamental analysis as soon as you start trading on Forex is not mandatory, but preferable. The more you learn about the institutions that drive a currency you bet one, the better you will get in building effective trading strategies and preventing risks.
Plus, there are many proofs in the Euro to Dollars history when two types of analysis were successfully combined. This means that you can focus your attention on the technical indicators, but still keep on hand on the pulse of the fundamental news.
One of the easiest ways to do this is to learn about all factors that affect your chosen currency and then choose several to monitor. You can either remember the dates of the key events or use an interactive economic calendar to get reminded each time there is something attention-worthy.
It also wouldn’t hurt to stay updated on the news of the government that controls your currency of preferences. Not a fan of going through news? Then just keep checking with fundamental analysis reports prepared by market specialists in your broker’s office.
Once you have selected a set of fundamental factors that you are planning to use in your trades, it can be a good idea to get familiar with the history of each particular factor. The process of seeing the two side by side can help you outline the significance of effect caused to the market. For instance, you can compare the History of Euro to dollar with the events of international trade over the same years to see that theoretical economics are not always right.
International trade and Forex rates
International trading is a very good indicator of the overall relationship between countries. And if we zoom in to each specific country we can judge on the health of local economics from the balance between export and import.
From the textbook definition of demand and supply, we know that a country that imports more than exports is experiencing a trade deficit. The longer such a deficit lasts, the higher there is a chance of an economy struggling and national currency devaluing.
But we also know that the USA is currently in a really extended period of trade deficit, yet the USD is still stronger than EUR.
There is one simple explanation for this: USD is the world’s largest reserve currency. That way the demand for the national coin itself overpowers the demand for its exports.
From this we can conclude that every fundamental factor can be outshone by another one, that’s why fundamental analysis is a very complex and subjective matter. Plus, every trader should always refer to the technical data before blindly following fundamental forecasts.
Because the news might say one thing, but the full history of EUR USD proves otherwise.
A final word in Euro to Dollar history
The Euro to the Dollar history is short, but eventful. It is also fair to say that with the current unraveling crisis caused by the global pandemic, we will see many historical events that concern the EUR/USD pair.
Great advice for anyone who's focused on trading the Euro against the American Dollar is to widen their horizons and bring other pairs into play. There are only a few currencies out there that get quite as much attention, JPY or GBP, for example. But there is also a whole sea of other currencies that can be exciting and profitable at times.
Keep learning about the Euro to Dollar history at the Forex market, but make sure to keep your options open and switch lanes when necessary to minimize the risks.
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