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This article is about the currency of the the European Union. For the company with stock ticker EURO, see EuroTrust A/S (EURO).

The Euro (also known as the “Anti-Dollar”[1]) is the official currency of 23 countries in the European Union, collectively known as the Eurozone. It is also the sole currency in 9 other European countries. Currently, it is the currency with the highest combined value of cash in circulation in the world, and the second most traded currency in the foreign exchange market behind the American dollar. It is denoted with a leading . For example, €75 is read "Seventy-five Euros".

The chart at left shows the EUR/USD Currency Pair; the number of U.S. Dollar (USD) equivalent to 1 Euro.

Economic History

The Euro traces its beginnings to the The Maastricht Treaty in 1992 in which the EU nations agreed to form a monetary and economic union. In order to participate in the common currency, members were required to meet certain budgetary (such as capping the budget deficit at 3% of GDP) and economic (e.g. maintaining an inflation rate close to the the EU average) conditions. In addition, member countries were required to peg their currencies to each other for a certain period prior to the launch. Not all EU members were able to adhere to these conditions and the Euro launched as an accounting currency in 1999 with 11 countries. Three years later, Euro denominated notes and coins started circulating on January 1, 2002.

Currently the Euro is the official currency of sixteen member states of the European Union, including Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. They are collectively known as the Eurozone The currency is also used in 5 other countries through official agreement, including Mayotte, Monaco, San Marino, Saint Pierre and Miquelon, and Vatican City. Finally, 6 other countries have also adopted the Euro but do not have an official agreement with the European Union. These countries are Akrotiri and Dhekelia, Andorra, Kosovo, Montenegro, Saint Barthélemy, and Saint Martin.

Euro Membership

Current Euro members are listed here in alphabetical order.

Notable EU Exceptions

Several European nations do not use the Euro as their currency, despite membership in the EU. Notable example include:

Factors affecting the Value of the Euro

Eurozone balance of trade
Eurozone balance of trade[2]
Inflation in Europe.
Inflation in Europe.[3]

The Euro is a floating currency, which means that the value of the euro is not "pegged" to any other currency. Therefore, the value of the Euro is determined by the demand and supply of the currency.

Central Bank Policy and Interest rates

The supply of Euro is regulated by the European Central Bank (ECB). The ECB is responsible for managing the monetary policy of the Eurozone. The ECB has the exclusive right to set interest rates for the Eurozone. The primary objective of the ECB is "to maintain price stability" within the Eurozone -- in other words, to keep inflation low. The present inflation target is at or around 2%.[4]

The ECB does not directly manage exchange rates of the Euro. However, interest rates affect the demand for a currency. At high interest rates, the currency becomes more valuable as it offers a return on investment for investors. Therefore, demand for the Euro, in part, is determined by the relative interest rates in Europe compared to other parts of the developed world. The fact that the Euro is the currency of 15 different nations means that the national governments cannot manipulate the currency to suit its needs. Unlike mauritius , European governments can not devalue the currency to help the export sector.

Balance of Trade

The current account is a function of trade balance (exports minus imports), income from abroad (such as dividends, income by foreign subsidiaries etc.) and other transfers (such as foreign aid and grants). In the earliest years of the Eurozone, it consistently ran trade surpluses; however, both 2006 and 2008 have been more volatile with a greater trend towards negative trade balances.

Inflation

Inflation is the result of rising prices in an economy over time. In other words, when inflation rate is positive a currency buys less goods than it did in the past. The sole mandate of the ECB is to maintain inflation near 2%.

Status as Reserve Currency

The dollar has been the primary reserve currency of the world since World War II; however, this trend is changing. As of 2006, roughly 65% of reserves held by foreign banks were in dollars and 25% were in Euros.[5]

Investing in the Euro

An investor can invest in the euro by buying and holding it. Currencies, as an asset class, do not produce any returns by themselves. The currency is only useful if it is invested in another asset (such as equities or bond). Investors can buy and sell euro futures traded at the Chicago Mercantile Exchange. Futures are better instruments for speculation since they are leveraged and hence are more sensitive to currency movements. A US investor can buy an European stock ETF -- such as the Vanguard European ETF (VGK). The CurrencyShares Euro Trust (FXE) offers return on euro plus accrued interest. ETF's have the benefit of offering the return on the underlying asset class in addition to currency appreciation.

Finally, a stronger euro helps european imports by making them relatively cheaper and hurts exports by making them more expensive for foreign buyers. An investor could bet on the euro by taking positions in European exporters and in companies that trade heavily with an euro member.

Companies that benefit from a stronger euro

Companies that manufacture abroad or purchase raw materials abroad, and then sell in Europe benefit from a strong Euro.[6]

Companies that benefit from a weaker euro

  • Greek shippers

Companies that manufacture in Europe and export to the U.S. such as [7]

Forex Trading[1]

Trading Hours

The most active EURO trading hours are from London Open (3:00AM ET / 8:00 GMT), Economic Releases (4:00AM ET / 9:00 GMT) and the typical time of release for U.S. Economic Releases (8:30AM ET/ 12:30 GMT).

Things to know when Trading the Euro

The Euro often moves with the Volatility Index. Lower volatility tends to be bearish for the EUR/USD and higher volatility has been bullish.

Members of the Eurozone – The euro is the only currency without a country. It is the presently the official currency for 16 countries and growing. All 27 members of the European Union except for Denmark and the United Kingdom are obliged to adopt the euro when they meet the criteria for entry.

Nicknames – The euro is also known as the single currency because it is the sole currency used by a number of European nations.

Central Bank - The European Central Bank conducts monetary policy meetings12 times a year and their decisions on interest rates could have significant ramifications for the currency market. Jean-Claude Trichet is the current President of the European Central Bank. His term began in 2003 and will last until 2012.

Most Active Trading Hours – Since the EUR/USD is the most actively traded currency pair in the world, it sees quite a bit of volatility when European and U.S. economic releases are due for release which is usually between 4:00 AM or 5:00 AM ET (9:00 – 10:00 GMT) or 8:30 to 10:00am ET (13:00 – 15:00 GMT)

What Does the Economy Rely On? – The most important sector in the European Union is services, which makes up approximately 70 percent of GDP.

Who Does the Economy Rely on for Trade?– Eurozone countries primarily trade with other members within the Eurozone. Outside of that, their biggest trading partners are the U.K. and U.S.

Market Moving Economic Releases – Central bank rate decisions are usually the most market moving indicators, which means that they can create the greatest volatility for any currency followed by the employment report, the consumer spending and inflation reports. In terms of the individual countries, the euro only responds to German economic data since Germany represents approximately 25 percent of the Eurozone on a GDP basis. Collectively, Germany, France, Italy and Spain make up 70 percent of Eurozone GDP.

Euro Economy[1]

The Euro Economy is comprised of 70% Services, 28% Industrial, and 2% Agriculture. It's largest trading partners are UK, US, China, Japan and Canada. Some other key facts about the Euro Economy:

  1. Only Currency Without a Country
  2. Used by 16 Out of the 27 Members of European Union
  3. Second Largest Reserve Currency Behind U.S. Dollar
  4. Collectively, the Eurozone is the Second Largest Economy in the World
  5. Germany is the Largest and Most Important Country in the Eurozone

General Economic Statistics

2008 GDP EstimateUSD $14.82 Trillion
Population:491 Million
Interest Rate*1.5%
Inflation**6%
Trade Balance***EUR -€4 Billion (seasonally adjusted)

Market Moving Economic Releases

  1. ECB Rate Decision
  2. German IFO (Business Confidence)
  3. German Unemployment
  4. German Consumer Prices
  5. German GDP (Gross Domestic Product)
  6. Manufacturing and Service Sector PMI

References

  1. 1.0 1.1 1.2 FX360.com, EURO Factsheet by Kathy Lien
  2. "Euro Area Balance of Trade", TradingEconomics, November 17, 2008
  3. European Central Bank, Retrieved November 11, 2008
  4. The Powers and Responsibilities of the European Central Bank, European Navigator, Retrieved November 14, 2008
  5. "Could the Euro and Dollar Share Reserver Currency Status?", Portfolio, June 13, 2008
  6. "Beward the Brawny Euro", BusinessWeek, November 29, 2004
  7. "A Strong Euro with Few Admirers", NYTimes, May 9, 2003
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