A Brief History of the Euro to Dollar Currency Pair
Reading time: 11 minutes
The Euro versus US dollar (USD) is the most popular currency pair by traded volume in the world. It's so established today, that it's easy to forget that fewer than 20 years ago, the Forex (FX) pair didn't even exist. This article is going to take a brief look at the EUR to USD history. We'll take a look at the origins of the FX pair, before investigating how central bank action and other factors have affected its Forex historical data.
Genesis of a Currency
The Forex markets in the the late 90s were significantly different from the way they are today. Back then, the German Deutschmark against the US dollar was one of the big pairs, along with the French Franc versus the US dollar.
It didn't take long before the course of currency conversion history changed however, because on 1 January 1999, the Euro came into existence. The journey leading to the euro began decades before. There were also earlier versions of Euro, in the form of internal accounting units for the European Community members:
- The European unit of account
- The European currency unit (ECU)
These were not true currencies however.
Instead, they were baskets of certain EC currencies, designed to aid stability in European exchange rates. Thus, they helped pave the way for a single currency. The ECU basket of EC currencies had a slightly different composition to those that would comprise the Euro. Despite this difference in composition, the ECU played a crucial role in the historical exchange rate of the Euro. This is because the value of one Euro was set as the value of one ECU at its inception on 1 January 1999.
This made the original Euro Dollar exchange rate 1.1686. Though the Euro wouldn't become a physical currency until 2002, the Euro launch at the beginning of 1999 tied the ratio of these Eurozone currencies together. Thus, the French Franc, the German Deutschmark, the Spanish Peseta, the Italian Lira, etc. ceased to have separate, floating historical FX rates after this point.
Instead, they were effectively pegged to the value of the Euro until they were completely folded into the shared currency we know today. Many saw the Euro in its early days as a contender to usurp the Dollar's unofficial title as the global reserve currency. While this could yet still happen, the Dollar still retains its crown by some margin.
So what has affected the history of EUR/USD?
While the short-term ebb and flow of the Euro to Dollar exchange rate can be influenced by a huge number of factors, the long-term performance of the currency pair has been driven by various fundamentals. Naturally, these are the same factors affecting currency rates as a general rule, no matter which FX pair you look at.
Two important factors that affect exchange rates in general are: the strength of the underlying economy, and monetary policy, which is implemented by the pertinent central bank. Of course, the latter is very much tied to the former. As the timeframes shorten, speculation starts to come into focus more and more. Therefore, expectations over central bank policy also have a major impact. If we look at the US Dollar to Euro exchange rate history, we can see some clear examples.
Many of these occurred after one of the biggest reductions in the Euro vs USD history: the global financial crisis that began in 2007. The stresses placed by this event on economies around the world forced a sequence of extraordinary responses from central banks. But here's a key part of the puzzle: the response wasn't uniform. The divergence in policy between the US Federal Reserve and the European Central Bank (ECB) in particular was pronounced.
How did they differ?
The Fed made early and aggressive moves to stimulate the US economy with three different tranches of quantitative easing (QE). In contrast, the ECB resisted QE for an extended period. When it finally began purchasing sovereign bonds as a stimulus measure, it was several years behind the FED.
Why did they differ?
The FED has a dual mandate:
- To foster maximum employment
- To stabilise prices
In contrast, the ECB's primary objective is solely price stability. This disparity in policy consequently led to some interesting effects on the Euro-Dollar exchange rate. In fact, for an extended period, the most important EUR/USD Forex news stories tended to be about FED stimulus. Another major issue facing the Euro was the Eurozone sovereign debt crisis. Certain member states had crippling amounts of national debt.
The uniform nature of monetary policy for the shared currency posed a thorny problem: you cannot tailor measures to the specific needs of different nations with a 'one-size-fits-all' monetary policy. This led to some questioning whether the single currency would even survive. Let's look at the specifics of the Euro against the Dollar over the period in question.
Here's a weekly EUR/USD chart dating back to 2007:
Source: MetaTrader 4 Supreme Edition - EURUSD Weekly Chart - 29 Jan, 2006 - Apr, 2015
Some of the key events for the period are marked on the chart above, so that we can see how they affected the Dollar Euro exchange rate history.
Euro Dollar Exchange Rate History Since 2007
The labelled events in EUR/USD history are as follows:
18 September 2007
FED cuts Fed funds rate by 50 basis points
Euro strengthened against Dollar
16 December 2008
FED cuts rates to near zero
Euro strengthened against Dollar
19 October 2009
The newly-elected Greek government revises deficit forecasts from 6.7% of GDP to 12.7% of GDP
Euro weakens against Dollar
1 June 2011
Moody's downgrades Greek debt by seven notches to junk status
Euro weakens against Dollar
18 December 2013
FED announces 'tapering' of stimulus will begin in January 2014
Euro weakens against Dollar into February 2014
14 July 2014
ECB president Mario Draghi prepares the market for QE, stating that it ' falls squarely in our mandate.'
Euro weakens against Dollar
22 January 2015
ECB introduces full blown QE
Euro weakens against Dollar
EUR/USD historical data shows a reasonably clear response to each of these events. Having looked at the currency rate by date, and having established that Euro to Dollar history is clearly influenced by central bank action - how do we gain insight into what that action might be?
For instance, the better our forecast for FED action, the better our ability to roughly forecast EUR/USD. Needless to say, this is easily said than done. A smart way of testing your forecasts without risking money though, is with a demo trading account. A Forex demo trading account enables traders to trade with virtual currency, in a risk-free trading environment, using real-time price information.
Here's the good news: one of the upshots of the financial crisis was increased communication from the FED. The central bank is reasonably explicit about which metrics inform its decision making. A key yardstick is the labour market, because of the FED's mandate to pursue maximum employment.
This is a reason why the monthly employment situation report is one of the most closely watched indicators in the Forex Calendar. The report contains monthly non-farm payroll (NFP) data. One of the reasons the data is so closely followed is that it has historically shown a strong correlation to US GDP growth.
GDP data is released quarterly and hence far less frequently, and with greater delay than the payroll data. The FED therefore uses the non-farm payrolls as a proxy for the health of the economy. A strong economy, with a tight labour market, is likely to increase inflationary pressures. This has implications for the price stability side of the FED's dual mandate. To reduce a complex subject to simple terms:
- The weaker the payroll report, the more likely the FED is to loosen the monetary policy
- The stronger the payroll report, the more likely the FED is to tighten the monetary policy
A tighter policy means greater returns on Dollar deposits and should, in theory, increase the attractiveness of the Dollar. Therefore, a tighter policy is bullish for the Dollar, with all other factors affecting exchange rate being equal. In reality, the FX rate history for EUR/USD can be more complex than this. That is because all other factors are rarely equal. Bear in mind, it is often the outcome of the data with respect to expectations that drives short-term direction. Let's look at a daily Euro to Dollar chart covering part of 2016:
Source: MetaTrader 4 Supreme Edition - EURUSD Daily Chart with an ATR attached - Data Range: 24 Mar, 2016 - 17 Oct, 2016
The red lines on the chart above mark the release dates of the employment situation report. The first line marks the report released in June, which contained May's employment data. Payroll growth in the May report was extremely weak, reported as 38,000 against the expectations for growth of over 150,000. We can see a big jump in the EUR/USD exchange rate coinciding with the report, reflecting Dollar weakness.
Similarly, the July report containing June's data was stronger than expected. Here, we can see EUR/USD dipping in the ensuing days, reflecting Dollar strength. Few as these examples are, the evidence of the historical foreign exchange rates seems to underscore the effect of payrolls on the Dollar. Another interesting thing shown by this Euro to Dollar chart is the volatility.
In the graph above, the trader has plotted the Average True Range (ATR) - a measure of volatility, beneath the chart. You can read more about volatility and ATR in our article on the most volatile currency pairs. The release of non-farm payrolls is generally accepted as being a time of brisk price movements.
Looking at the ATR levels, you might argue that there are minor upward blips in volatility on each day of the NFP report, but it's not clear that there is any large impact on the historical currency exchange rate on these days. ATR is one of the standard indicators that comes with MetaTrader 4. If you're interested in gaining access to an even wider selection of custom-made indicators, you should consider downloading MetaTrader 4 Supreme Edition. It's a custom-made plugin for MetaTrader 4, and it's available to traders free of charge.
International Trade and Foreign Exchange Rates
When the value of a country's imports exceeds its exports, it is known as a trade deficit. Running a long-term trade deficit should lead to a flow of wealth out of the country, and theoretically, a decline in the value of the currency. However, the US has been running huge trade deficits for an extended period.
Despite this, the Euro to Dollar exchange rate history shows no evidence to back up the idea of a declining Dollar. An explanation for this is the extensive use of the Dollar as a reserve currency: this means that demand has been high enough to counter such depreciation.
A Final Word on Euro to Dollar History
Of course, the Dollar to Euro history is as complex as you care to make it. We have touched upon some key areas in this article, but there are many more factors that affect historical foreign exchange rates. There are various geopolitical risks, such as war and elections, as well as economic variables, such as output levels, demand, and the supply of money.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.