History of Forex: How the EUR USD Began
In the modern history of Forex trading, the US Dollar vs Euro has been 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, this Forex (FX) pair didn't even exist.
This article is going to take a brief look at Forex history, with a focus on the Forex EUR USD currency pair. We'll take a look at the origins of this FX pair in the greater arch of Forex history, before investigating how central bank action and other factors have affected its Forex historical data.
History of the Euro Currency: US Dollar vs Euro History:
We start our recollection of the history of forex trading in the 90s.
The status of Forex markets in the late 90s was significantly different from today.
Back then, the German Deutschmark against the US dollar was one of the biggest pairs in all of FX history, along with the French Franc versus the US dollar.
It didn't take long before the course of currency exchange history in the history of Forex trading changed - on January 1, 1999, the Euro came into existence.
Since then, Forex history hasn't been the same.
In the history of the Forex market, the journey leading to the Euro had begun decades before. There were also earlier versions of the 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, which is why they didn't change the course of FX history like the introduction of the final Euro currency did.
Thus, they helped pave the way for the single currency.
The ECU basket of EC currencies had a slightly different composition to those that would comprise the Euro and ultimately change Forex history as we know it.
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 January 1, 1999.
This set the original Euro-Dollar exchange rate in Forex history at 1.1686. Though the Euro wouldn't become a physical currency in foreign exchange history 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, their Forex statuses were effectively pegged to the value of the Euro until they were completely folded into the shared currency we know today, bringing us to a recent stage in the history of Forex.
Many saw the Euro in the early days of its Forex status 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.
In the History of Forex, What Has Affected the EUR/USD?
While the short-term ebb and flow of the Forex EUR USD exchange rate over the history of Forex has been 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 that have affected the currency exchange history as a general rule in the history of Forex, no matter which FX pair you look at.
Two important factors that have affected exchange rates over the course of Forex history are:
- The strength of the underlying economy
- 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 Forex EUR USD exchange rate in the history of Forex, we can see some clear examples.
Many of these occurred after one of the biggest reductions in the Euro vs USD Forex price history:
- One of them was 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 this 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.
History of the Euro Currency: 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.
History of the Euro Currency: 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 one factor:
- 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 some specifics of the Forex price history in the Euro against the Dollar over the period in question.
Here's a weekly Forex historical EUR USD chart dating back to 2006:
Source: Admiral Markets MetaTrader 5, EURUSD, Weekly - Data range: from April 2, 2006, to July 1, 2021, accessed on July 1, 2021, at 13:00 BST. - Please note: Past performance is not a reliable indicator of future results.
Some of the key events for the period in Forex history are marked on the chart above so that we can see how they affected the Forex EUR USD exchange rate history.
Euro Dollar Exchange Rate in the History of Forex: Since 2006
The labelled events in the EUR/USD Forex 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
|8||13 December 2015||Fed hikes interest rates for first time in a decade.||Euro strengthens against Dollar|
|9||8 November 2016||Donald Trump wins US Presidential election.||Euro weakens against Dollar|
|10||26 October 2017||ECB halves 60 billion EUR bond-buying programme||Euro strengthens against Dollar|
|11||13 December 2018||ECB ends 2.5 trillion EUR QE stimulus programme||Euro weakens against Dollar|
|12||25 July 2019||ECB President Mario Draghi prepares for interest rate cut as growth slows||Euro weakens against Dollar|
Forex 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 the Euro to Dollar currency exchange 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 easier said than done.
However, one smart way of testing your forecasts without risking money, is with a demo trading account. A Forex demo trading account enables you to trade with virtual currency, in a risk-free trading environment, using real-time price information so you can hone your skills before starting on the real markets.
Advanced traders even use demo accounts to test out new strategies, so it's not something that's only for beginner traders.
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 has been one of the most closely watched indicators on the Forex Calendar in currency exchange history, particularly for those trading the EUR USD.
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.
In other words:
|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 the exchange rate being equal.
In reality, the Forex price history for the EUR USD pair can be more complex than this.
This is because all other factors are rarely equal. It is often the outcome of the data with respect to expectations that drives short-term direction.
With this in mind, you can develop your own Forex EUR USD forecast for today, or whenever data is to be released.
However, it is important to not oversimplify your analysis and rely on this one principle. Trading entails incredible financial risk and the best traders consider many indicators and use sophisticated strategies to develop forecasts and minimize risk.
Let's now turn our attention to a daily Forex historical EUR USD live chart covering part of 2021:
Source: Admiral Markets MetaTrader 5, EURUSD, Daily - Data range: from Dec 30, 2020, to July 1, 2021, accessed on July 1, 2021, at 13:00 BST. - Please note: Past performance is not a reliable indicator of future results.
The red lines on the chart above mark the release dates of the US employment report. We generally see larger candles (from high to low) representing increased trading activity.
In other cases, the news has also changed the preceding trend of the currency. 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 the 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 have been 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.
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US Dollar vs Euro Historical Rates and International Trade
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.
The US has been running huge trade deficits for an extended period.
Despite this, the rate of the US Dollar vs Euro, in 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.
What Has Caused EUR USD Currency Pair Volatility in Forex History?
To understand what causes volatility, especially in the US Dollar vs Euro history, we must first establish what volatility is.
|Volatility refers to the degree and frequency at which an asset's price moves.|
In markets where traders are trading on the direction of price movements of assets, these traders commonly see volatile assets as those that offer profit opportunities. Because many factors influence its price, the EUR USD pair has often offered volatility throughout Forex history, which has been attractive to most traders.
How Has the Euro Created Volatility in the EUR USD Pair?
It can be effective to use a Euro-based fundamental analysis because, in the history of Forex, the Euro has been highly influenced by political and economic developments within all of the 16 countries it represents.
Because there is a large number of nations that can release different data throughout the day, there can be many moments throughout the day in which the price of the Euro is impacted.
How Has the USD Created Volatility in the EUR USD Pair?
Now, in considering the EUR USD pair, we must look at volatility in the USD as well.
News coming in throughout the day that is connected to the US economy and its major trading partners can affect the value of the dollar as well.
With this said, it's clear to see that there are many opportunities to take advantage of price movements throughout the day with the EUR USD pair.
As always, an intelligent strategy is essential for minimizing risks and avoiding losses.
Small moves can amount to large gains/losses
Let's look at one specific example that can illustrate the effect of EUR USD volatility in Forex history. Basically, one small change (for example, one pip) in the value of the EUR USD pair, can translate into large gains or losses.
"PIP" stands for Point in Percentage.
This is a unit of measure that Forex traders use to refer to the smallest change possible in value between two currencies.
|A pip is the value of a one-digit change in the fourth decimal place in a Forex quote.|
In the case of the EUR USD, if it changes from 1.1703 to 1.1704, this is a one pip movement, or one 'point' movement.
Let's calculate the value of a pip with the EUR USD pair:
Just multiply one pip (0.0001) by the specific contract size (Pip Value = Contract Size x One Pip).
Now, most brokers offer a standard and a mini contract, amounting to 100,000 and 10,000 units of the base currency, respectively. Therefore, in a standard contract, the pip value of the EUR USD can be calculated as follows:
0.0001 x 100,000 = 10
Therefore, in a standard contract, one pip is equal to $10.
Throughout the history of Forex trading, small changes in value, even several pips, have amounted to substantial losses.
In a mini contract, one pip is equal to $1. Mini contracts do not amount to such rapid gains or losses, so they may be safer.
However, a sophisticated and proven strategy is essential for minimizing risk and losses as we mentioned earlier.
EUR USD trading hours
It is worth mentioning now, that an additional advantage of this pair is the Forex EUR USD trading hours.
|Anyone can trade the EUR USD 24 hours a day, 5 days a week.|
In fact, this isn't only true for the EUR USD pair. The Forex market is open 24 hours a day.
Round-the-clock access to the Forex market is possible due to international time zones.
The Forex market is the biggest financial market in the world. To be clear, not every market is open around the clock, but at any given time of the day or night, at least one market around the world is open.
Of course, there is an overlap of the closing and opening times for several markets.
Each day, Forex trading opens in the Australasia region.
Europe is next, followed by North America.
A Final Word on the History of Trading the US Dollar vs Euro
The US Dollar vs Euro history is as complex as you care to make it.
In this article, we have touched upon some key areas of this specific period of Forex history, but there are many more factors that have affected historical foreign exchange rates and continue to do so in today's Forex markets.
- Geopolitical risks, such as war and elections
- Economic variables, such as output levels, demand, and the supply of money
These are important aspects to consider as well.
Now that you understand the US Dollar vs Eur history and what influences it, we wish you luck in your future trading!
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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.