EUR/USD: a euro to dollar history

EUR/USD is the world’s most heavily traded currency pair. This article explores the history of its European half – including why the euro was created, who uses it, and how its price against the US dollar has changed over time.

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The launch of the euro

The euro was launched on 1 January 1999 as a digital currency. Eleven countries and three sovereign states adopted the euro on this date, with their existing national currencies set at fixed exchange rates against the euro. They were:

Member state Previous currency
Austria Austrian schilling
Belgium Belgian franc
Estonia Estonian kroon
France French franc
Germany German mark
Ireland Irish pound
Italy Italian lira
Luxembourg Luxembourgish franc
The Netherlands Dutch guilder
Portugal Portuguese escudo
Spain Spanish peseta

 

Non-members  Previous currency
Monaco Monégasque franc
San Marino Sammarinese lira
Vatican City Vatican lira

 

Physical euro bank notes and coins weren’t introduced until three years later – on 1 January 2002 – and countries continued to use their existing bank notes until the changeover period began. 

Why was the euro introduced?

The euro was introduced to create an economic and monetary union. The primary aim was to reduce the costs and risks associated with cross-border transactions. Wider aims included promoting economic growth, employment and price-parity across Europe.

The idea of a single European currency was touted throughout the sixties and seventies, as turbulent currency markets threatened the key economic agreements of the European Economic Community (EEC).

The group responded by tying their currencies to a new European currency unit (ECU), a digital currency whose value was based on a basket of European currencies. The convergence of monetary policy under this system brought many economic benefits, and increased calls for a true single currency.

The early years of the euro

When it launched in 1999, the euro was worth 1.1747 US dollars on the foreign exchange (FX) market, hitting a high of 1.1906 USD on the first day of trading. 

However, the euro soon depreciated against the dollar, dropping below parity several times between 2000 and 2002.

This happened because the currency was purely digital in this era, with national currencies pegged at fixed exchange rates to the euro.

Some of these currencies depreciated before physical euros were introduced in 2002, leading to a depreciation of the euro itself.

Euro to USD historical chart, 1 January 1999 to 1 January 2007

Initial success

Physical euros were introduced in 2002 and national currencies were phased out. The benefits of a single currency soon became apparent. Countries began to conduct more business with each other, taking advantage of the lack of foreign exchange risk and eradication of transaction costs. The result was GDP growth across the eurozone between 2002 and 2007. This increased the popularity of EUR/USD and caused its price to surge.

Prices continued to rise in the first half of 2008 as the US went into recession, which weakened the dollar.

The eurozone in crisis: 2008 to 2014

The years 2008 to 2014 were marked by economic crises – first in the US and then in the eurozone – which played havoc with EUR/USD’s price.

The US was in recession from December 2007 to June 2009, as a result of the subprime mortgage crisis. This saw EUR/USD rise, reaching a historic peak of 1.60 on 13 July 2008 – the result of federal funds rate cuts and an increase in demand for euros.

Unfortunately, the effects of the US recession soon spread globally. Several European banks required bailouts, while others were forced to pay back debts that could not be refinanced on illiquid global markets. This crisis caused the eurozone to go into recession in the second half of 2008, with EUR/USD falling to 1.26 by 17 November 2008.

Euro to USD historical chart, 1 January 2008 to 31 December 2014

Eurozone debt crisis

EUR/USD had partially recovered from the effects of the 2008 recession by late 2009 – that is, until it was revealed that Greece had been using creative accounting techniques to hide its debt levels, circumventing the strict rules imposed by the EU’s Stability and Growth Pact (SGP).

In fact, Portugal, Ireland, Italy, Greece and Spain (PIIGS) had all over-leveraged themselves, either as a result of the financial crisis or poor fiscal policy in the build-up. This undermined confidence in Europe and investors began to sell their bonds in affected countries to invest in currency elsewhere. As a result of these revelations, EUR/USD fell to 1.20 by 5 June 2010.

The European Central Bank (ECB) was unable to respond quickly because it knew that any action it could take would affect the entire eurozone. There was also little appetite in more prosperous countries to increase their own debt levels (or tax rates) to fund bail outs.

Various international bodies – including the World Bank, International Monetary Fund (IMF) and ECB – spent over €544 billion in the years since 2009 to deal with the debt crisis. These funds have required certain countries to accept strict austerity measures, which have hindered economic growth in Greece, Italy and Spain.

These measures helped to improve the situation in the eurozone but fragile investor confidence impacted EUR/USD. Between 2009 and 2014, the pair saw major price changes in response to political and economic events – including interest rate adjustments on both sides of the Atlantic, political unrest in Greece, and fears over Ukraine.

The euro today

Since 2015, the US economy has strengthened relative to that of its European counterpart, which led to a divergence of monetary policy. While the Fed looked to increase interest rates in response to a strengthening economy, the ECB had to keep interest rates low and introduce a quantitative easing programme to boost spending in Europe. This kept the price of EUR/USD relatively low, at least compared to its price at the beginning of 2014.

The euro has also been rocked by political and economic uncertainty in recent years. Britain voted to leave the EU on 23 June 2016, causing EUR/USD to tumble - from 1.14 on the day of the referendum to 1.11 the day after. The uncertainty surrounding the final Brexit deal continues to affect euro pricing, with Britain not expected to leave the EU until March 2019. A ‘hard Brexit’ (no deal) is likely to have a negative impact on the euro, whereas a ‘soft Brexit’ (in which the UK and EU maintain close ties) could limit the impact or even strengthen the euro.

Eurosceptic parties have also increased in popularity on the continent, contributing to fears that other countries may follow Britain’s lead. These fears were mostly assuaged by election wins for pro-European politicians like Emmanuel Macron (France), Angela Merkel (Germany) and Mark Rutte (the Netherlands) in 2017. However, the future of the EU and euro remains uncertain. Catalonia took steps towards independence from Spain with an illegal referendum in September 2017, and the Brexit deal is yet to be agreed.

Euro to USD historical chart, 1 January 2015 to 8 November 2017

Which countries use the euro?

Nineteen of the 28 countries in the European Union used the euro as their official currency.* This compares to 11 of 15 countries when the euro was launched in 1999, reflecting the growth of the EU since then.

Six non-members also use the euro though only four of these – Andorra, Monaco, San Marino and Vatican City – joined with the approval of the EU. The other two – Kosovo and Montenegro – are not part of the eurozone and use the currency without formal approval.*

Since 2015, the US economy has strengthened relative to that of its European counterpart, which led to a divergence of monetary policy. While the Fed looked to increase interest rates in response to a strengthening economy, the ECB had to keep interest rates low and introduce a quantitative easing programme to boost spending in Europe. This kept the price of EUR/USD relatively low, at least compared to its price at the beginning of 2014.

Which EU countries aren’t using the euro?

Nine EU member states do not currently use the euro.* They are Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom.

These countries – with the exception of Denmark and the UK – are expected to join the euro in time, subject to meeting certain criteria. Any countries joining the EU in the future will also be expected to join the single currency.

The UK and Denmark, however, were members of the EU when the currency launched and were able to negotiate opt-out clauses. This means they are exempt from joining the euro. 

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*At the time of writing (8 November 2017).

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.