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A brief history of the euro to dollar currency pair

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Euro versus the 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 pair didn't even exist.

This article is going to take a brief look at euro 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.

So, let's first talk about how the euro began.

Genesis of a currency

When I first came to the Forex markets in the the late 90s, things were 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 US dollar.

It didn't take long before the course of currency conversion history changed, though…

...because on 1 January 1999, the euro came into existence.

The journey leading to the euro began decades before.

There were earlier versions of euro, in the form of internal accounting units for the European Community members:

These were:

  1. the European unit of account
  2. 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.

Now, 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, German deutschmark, Spanish pesata, 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 global reserve currency.

While this could yet 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 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:

  1. the strength of the underlying economy
  2. monetary policy 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:

  1. to foster maximum employment
  2. to stabilise prices.

In contrast, the ECB's stated 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 going back to 2007:

euro dollar

I've marked some of the key events for the period on the chart, 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 this EUR/USD history are as follows:


Date

Event

Effect

1

18 September 2007

Fed cuts Fed funds rate by 50 basis points

Euro strengthened against dollar

2

16 December 2008

Fed cuts rates to near zero

Euro strengthened against dollar

3

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

4

1 June 2011

Moody's downgrades Greek debt by seven notches to junk status

Euro weakens against dollar

5

18 December 2013

Fed announces 'tapering' of stimulus will begin in January 2014

Euro weakens against dollar into February 2014

6

14 July 2014

ECB president Mario Draghi prepares the market for QE, saying it ' falls squarely in our mandate.'

Euro weakens against dollar

7

22 January 2015

ECB introduces full blown QE

Euro weakens against dollar

The EUR/USD historical data shows a reasonably clear response to each of these events.

Having looked at the currency rate by date and established that euro to dollar history is clearly influenced by central bank action…

...how do we gain insights 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 more easily said than done.

A smart way of testing your forecasts without risking money, though, is our demo trading account.

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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:

  1. the weaker the payroll report, the more likely the Fed is to loosen the monetary policy
  2. 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, 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:

employment report impact on euro dollar pair

The red lines 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.

I've plotted 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 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.

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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 that the extensive use of the dollar as a reserve currency:

this means demand has been high enough to counter such depreciation.

A final word on the euros to dollars history

Of course, the dollar to euro history is as complex as you care to make it.

We have touched upon some key areas…

...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 and the demand and supply of money.

If you are interested in reading a bit more on the flash crash, why not take a look at our articles on the history of GBP/EUR or GBP/USD currency pairs.