History of the Euro as the Dominant Forex Currency

The main question for professional traders as well as for average people interested in finance has been “Which currency is better to choose for trading: the Dollar or the Euro”.

In 1999 the European Central Bank, the major monetary body of the EU introduced a new currency which became very popular in Europe. First the new currency marked a short rise and then it was characterized by downside trend. Definitely, every central bank aims at keeping the volume of money at a sufficient level to maintain the whole payment system. But, on the other hand, central banks aim at restraining so called “free money” in order to prevent price rising. So, balancing between these two objectives a central bank of every country determines economically grounded volume of financial market in the process of designing its monetary policy.

To accept a certain additional volume of money an economy needs to possess additional volume of goods and services, i.e. the GDP is supposed to grow otherwise such monetary policy will result into inflation. When the Euro was introduced the European economy could not perform a significant growth in GDP for a short period of time. As a result everyday commercial bank system of Europe faced up extending obligations, which was converted into other assets by the ECB, those assets particularly included currencies of other countries. This strategy brought a sharp depreciation of Euro (up to 30 percent) at the period of simultaneous circulation with other Europe`s currencies. Another psychological factor of weak performance of a new currency was the NATO intervention into Yugoslavia carried out by the USA.

Downside trend in Euro was preserving until March 2002 when the new European currency was introduced in cash form substituting former currencies of the Euro-zone countries.

Unlike clearing cash money may deeply influence the price of goods and services. The ECB should have apprehended such an influence. But at the same time it was absolutely impossible to determine how many bank notes were needed to maintain the economy. And the ECB took a right decision to remain the economy with insufficient volume of money and then it filled the gap rather than provoked inflation. And the Bank withdrew more assets from the market than it introduced. For Euro this period appeared to be successful as the US economy performed weak results and the geopolitical situation became aggravated.

Each of three world major currency markets, including Japanese, European and American faces either deficit or surplus of financial money resources. So as it is widely considered that value of a currency is expressed in terms of the US Dollars, the main criteria for determining the value of national currency are conditions of both domestic and American markets. In 2002-2003 the good performance of European market accompanied by weakness of the US economy made the Euro appreciate and rule out its further decline. Indeed, the situation that took place with Euro shows us the influence of monetary bodies on the performance of financial markets.

These facts are of high performance for the investors planning strategic direction for their investment programs. In particular, the United Kingdom is currently deciding whether to join the Euro-zone. In case of a positive decision the mechanism of introducing the Euro and withdrawal of the Pound will be the same as in other Euro-zone countries. First clearing operations with Euro will be available and cash will be introduced gradually replacing the British Pound.
The first stage will be characterized by simultaneous circulation of the Pound and the Euro without cash transfer and at the second stage both currencies will circulate in cash at the same time. It will definitely result in change of value of each of them. However, it is expected that the Euro will gain in the end. Anyway, all the countries trying to shift to the Euro will face to some extent such fluctuations.

Regards, Dennis Vydrin