Introduced in 1999, the euro has an interesting and unique history. Holding the title of the official currency of most EU countries, understanding the dynamics between each major currency can be helpful to an overall strategy, and the euro is no exception.
Introduction to the Euro (EUR)
In terms of liquidity, how does the euro compare to the U.S. dollar?
The euro was introduced in 1999 and, as of January 2019, is the official currency of 19 countries, the most of any currency worldwide in modern times. The euro is also the second most traded currency in the world, following only the US dollar.
As a currency, the euro is managed by the European Central Bank (ECB). As the economic situation of each country can differ greatly, the ECB is tasked with the challenge of developing a monetary policy strategy that can be implemented universally across all economies that have adopted the euro.
Membership in the European Union is often tied to the use of the euro, although some member states, like Romania, have not adopted the euro as their official currency.
Trading volume ratio in different currencies (2002). Source: Bank for International Settlements (BIS). Past performance is not indicative of future results.
The world's #2 international currency
In addition to being the number two international currency in the world, the euro also maintains the title of the second-most held reserve currency of central banks globally, following the US Dollar.
As a result, this often means that when the outlook is bearish on the US dollar, the market will buy euros and sell the US dollar simultaneously in order to make a profit. This relationship between the two currencies is one of the major factors contributing to EUR/USD being the most traded currency pair worldwide.
Again, owing to this connection between the two currencies and similarly to the dollar, the performance of the euro can be correlated to other assets, such as oil and gold.
The graph below shows both the price action of oil, EUR/USD and EUR/JPY respectively. Although not exactly the same, it can be said that the relationship between the price of each asset is not unrelated.
EUR/USD, EUR/JPY and Crude oil prices compared (2017-2019). Past performance is not indicative of future results.
A way to view the economy of the Eurozone
The economy of the eurozone is unique in how each country contributes to overall gross domestic product (GDP).
Germany alone accounts for the highest proportion of eurozone GDP, at around 30%, while France comes in second, with the two nations together responsible for almost half of the total GDP of the eurozone economy1. If Italy and Spain are added to this list, this figure will increase to three-quarters of total GDP.
On account of this, it is often helpful to study key data releases from Germany, France, Italy, and Spain respectively, to better understand the performance and overall direction of the eurozone in general.
Trading volume ratio in different currencies (2022). Source: Bank for International Settlements (BIS). Past performance is not indicative of future results.
How does the gap between American & German 10-year bond yields affect euro price?
The gap between US and German bond yields can sometimes influence the direction of the EUR/USD.
The chart below compares the USD/EUR (the reverse of the EUR/USD) to the gap between the US 10-year bond yield and the German 10-year bond yield. A strong correlation can be seen.
In addition, the market will react to the gap in bond yields between Eurozone countries. For example, if the bond yields of another country rise against Germany’s bond yields, a larger gap indicates a higher possibility of risk in that country. This in turn becomes a factor when selling the Euro.
10-year bond yields comparison: US vs Germany (2003-2023). Past performance is not indicative of future results.
How does euro volatility change at market open?
The euro, as an asset, can experience different levels of volatility across the different market sessions.
Typically, the euro undergoes less volatile changes in price during the Asian session, but naturally, during the European session, volatility can be significantly higher. During the European session, many traders will focus on trading EUR/USD.
That said, there can be some exceptions. EUR/JPY can experience some volatility during the Asian session, but often traders will choose to trade USD/JPY instead, often boasting higher volatility than its European counterpart.
Understanding where the most market liquidity can be found can be very important to determining the probability of your trade being successful.
Frequently asked questions
The euro was introduced in 1999 and, as of January 2019, is the official currency of 19 countries, the most of any currency worldwide in modern times. The euro is also the second most traded currency in the world, following only the US dollar.
As a currency, the euro is managed by the European Central Bank (ECB). As the economic situation of each country can differ greatly, the ECB is tasked with the challenge of developing a monetary policy strategy that can be implemented universally across all economies that have adopted the euro.
Membership in the European Union is often tied to the use of the euro, although some member states, like Romania, have not adopted the euro as their official currency. As of January 2019, the Euro is the currency of 19 members of the European Union. It is the second most traded currency in the world after the US Dollar. The Euro is also the second most liquid currency in the world after the US Dollar. It is also second only to the US Dollar among the reserve currencies of central banks. Therefore, when there is a negative situation against the US Dollar, the market will buy Euros and sell US Dollars to make a profit. To find out about the strength of the US Dollar, we achieve a better understanding if we study the Euro exchange rate (EUR/USD) first.
This article and its contents are intended for educational purposes only and should not be considered trading advice. Forex trading is high risk. Losses may exceed deposits.
