EUR/USD Profile
Introduction
The Euro is the official currency of 17 member states of the 27 European Union members. It is the most
traded currency after the U.S dollar and is considered as the second largest reserve currency in the
world. During the 1950’s, exchange rates were fixed but adjustable and remained stable under the well
functioning international monetary system (the Bretton Woods system). Hence, Europe’s ‘founding
fathers’, who negotiated the Treaties of Rome in the 1950’s did not think of a common currency, and
thus the European Economic Community (EEC) never felt the need to pursue monetary integration.
But, by the end of the 1960’s, the global economic scenario had changed drastically and the Bretton
Woods system was showing signs of disequilibrium due to U.S. balance of payments policy. Rising
uncertainties led to several exchange rate and balance of payment crises among the EEC member
states. The idea of common currency evolved in 1962; under the ‘Marjolin Memorandum’, European
Union made its first proposal for an economic and monetary union. However, the road to euro took
almost four decades. By end of February 2002, Euro banknotes and coins were introduced and became
the sole legal tender in the Euro area.
The EUR/USD exchange rate is one of the most important relative prices in the global economy and
in the global monetary system. Fluctuations of this rate have an impact on the competitiveness and
purchasing power as well as on the value of accumulated assets of internationally diversified investors.
The pair fluctuates freely and is therefore determined by demand and supply in the foreign exchange
market. The euro is the second most exchanged currency, representing 39% of all currency transactions
and 28% of the total currency market turnover. The currency pair has displayed a volatile trend since
the last quarter of 2010 with growing global inflationary pressures coupled with the lingering Euro
zone sovereign debt crisis as Greece, Spain and Portugal suffered ratings downgrades. On 7th March
2011, the single Euro currency rose to a four-month high moving above the key $1.40 level. Market
participants reacted to comment from European Central Bank (ECB) President, Jean Claude Trichet,
who indicated that there could be a rise in the bank’s benchmark interest rates in April following reports
that the euro zone’s annual inflation rate jumped to 2.6% in March. The Inflation rate is expected to stay
above 2% for the whole of 2011.
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