What Is the Currency Pair: EUR/USD (Euro/U.S. Dollar)?
The Currency Pair EUR/USD is the shortened term for the euro against the U.S. dollar pair, or cross for the currencies of the European Union (EU) and the United States (USA). The currency pair indicates how many U.S. dollars (the quote currency) are needed to purchase one euro (the base currency). Trading the EUR/USD currency pair is also known as trading the "euro." The value of the EUR/USD pair is quoted as 1 euro per x U.S. dollars. For example, if the pair is trading at 1.50, it means it takes 1.5 U.S. dollars to buy 1 euro.
Key Takeaways
- The EUR/USD is the world’s most-traded forex pair.
- Its value represents the number of U.S. dollars required to buy a single euro.
- It is affected by government and economic policies, as well as supply and demand dynamics in currency markets.
Basics of Currency Pair: EUR/USD (Euro/U.S. Dollar)
The EUR/USD pair is the most widely traded pair in the world. The pair represents two of the world’s biggest economies. It is affected by factors that influence the value of the euro and the U.S. dollar in relation to each other and to other currencies.
For example, the interest rate differential between the European Central Bank (ECB) and the Federal Reserve (Fed) can have a major influence on the value of these currencies when compared to each other. When the Fed intervenes in open market activities to make the U.S. dollar stronger, the value of the EUR/USD cross could pull back or decline due to strengthening U.S. dollar compared to the euro.
Along the same lines, bad news from the EU economy may have an adverse effect on prices for the EUR/USD pair. News of the government debt crisis and immigrant influx in Italy and Greece resulted in a euro selloff, prompting the pair's exchange rate to plunge.
More recently, in 2022, the EUR/USD pair infamously briefly plunged below 1.00 for the first time in history, as rising interest rates in the U.S. helped make the American currency stronger, while the war in Ukraine and the energy crisis it brought about took a toll on its European counterpart.
Brief History of the Euro Currency
The euro currency originated in 1992 as a result of the Maastricht Treaty. It was originally introduced as an accounting currency in 1999. On Jan. 1, 2002, the euro began circulating in member countries of the EU, and over the course of several years, it became the accepted currency of the European Union,ultimately replacing local currencies of many of its members.
Consequently, the euro integrates and represents a large number of European economies. This serves to stabilize currency exchange rates and volatility for all members of the European Union. It also makes the euro one of the most heavily traded currencies in the forex market, second only to the U.S. dollar.
As of July 2024, 20 of the 27 EU member countries use the euro, including the most recent addition, Croatia, which adopted the currency in January of 2023. According to the latest ECB figures, there are over 29 billion euro banknotes in circulation with a combined value upwards of €1.5 trillion.
Reading a EUR/USD Price Chart
Unlike a price chart for a stock where the indicated price directly represents a price for the stock, the price listed on a price chart for a currency pair represents the exchange rate of the two currencies. Therefore, the directional indication of a chart corresponds to the base currency.
Using the earlier example, when a trader takes a long position in the EUR/USD at 1.50, as the rate increases to 1.70, the euro strengthens (as indicated on the price chart), and the U.S. dollar weakens. Now it takes $1.70 (more dollars) to purchase 1.00 euro, making the dollar weaker and/or the euro stronger.
It is important to understand that the base currency of the pair is fixed and always represents one unit. Thus, the source of the strengthening or weakening is not reflected in the rate. The EUR/USD rate can increase because the euro is getting stronger or the U.S. dollar is getting weaker. Either condition results in an upward movement in the rate (price) and a corresponding upward movement in a price chart.
