Currency Pair: EUR/USD (Euro/U.S. Dollar)

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What is the 'Currency Pair: EUR/USD (Euro/U.S. Dollar) '

The Currency Pair EUR/USD is the abbreviation for the euro and U.S. dollar pair or cross for the currencies of the European Union (EU) and the United States (USD). 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.

BREAKING DOWN 'Currency Pair: EUR/USD (Euro/U.S. Dollar) '

The EUR/USD is affected by factors that influence the value of the euro and/or the U.S. dollar in relation to each other and to other currencies. For this reason, the interest rate differential between the European Central Bank (ECB) and the Federal Reserve (Fed) affects 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, for example, the value of the EUR/USD cross could decline due to a strengthening of the U.S. dollar compared to the euro.

Brief History of the Euro Currency

The euro currency originated on 1992 as a result of the Maastricht Treaty. It was originally introduced as an accounting currency in 1999. On Jan. 1, 2002, the euro currency began circulating, and over the course of several years, it eventually became the accepted currency of the European Union and ultimately replaced the 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.

Reading a EUR/USD Price Chart

Unlike a price chart for a stock in which 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 in the pair. 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 currency at 1.50, as the rate increases to 1.70, the euro increases in strength (as indicated in the price chart) and the U.S. dollar weakens. Now it takes $1.70 (more dollars) to purchase the same euro, making the dollar weaker and/or the euro stronger.

However, 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 and/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.

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