Who should consider trading the dollar/euro?
Someone with strong convictions about the prospects for either the US or euro area economy. Buying the currency is just about the most direct way of backing a hunch that, for example, America is on the brink of a boom or that the euro area’s problems are behind it.
Anyone wanting to hedge an investment position. You may be heavily invested in, for example, euro area stocks but want a side bet on US growth. A dollar position would be a good proxy for the health of the American economy.
Day traders. Short-term movements in the dollar/euro rate are an ideal play for nimble-footed traders who can be in and out of a currency very quickly.
Why talk about the dollar/euro trade?
These are the world’s largest currency units and are used to finance an enormous volume of trade between the US and the 19-nation euro area. Were their relationship fixed in terms of exchange rates, the dollar/euro trade would be of little interest to market participants. But it’s not. The relative values of these two monetary units have moved up and down, sometimes quite sharply, since the euro was launched in January 1999.
Where there is movement of this sort, there is the opportunity for a potentially profitable trade.
What do I need to know about the dollar and the euro?
The two currencies serve economies that jointly have gross domestic product of $31 trillion; $19 trillion in the US and $12 trillion in the euro area. That amounts to more than 40 per cent of a world GDP of $75.2 trillion.
These are, quite simply, the most powerful economic blocs in the world.
But while the two currencies are today traded back and forth in huge volumes, their roots are very different. The dollar came into being in 1785 and jostled alongside other currencies during America’s great westward expansion. The US did not get a central bank, the Federal Reserve, until 1913.
By contrast, the euro was proposed, approved and launched in the nine short years since 1990, complete with the European Central Bank and a committee of finance ministers (the Eurogroup) to oversee the currency.
Issue of the dollar is in the hands of the US Treasury but the greatest single influence on its value are the interest-rate decisions taken by the Federal Reserve. The euro is the joint responsibility of the ECB, the Eurogroup and the European Commission’s monetary affairs commissioner.
How have the two currencies traded against each other since 1999?
To describe it as an 18-year rollercoaster ride would be no exaggeration. The euro was launched at $1.17 and promptly sank first to parity and then below it. This was unfortunate, given the stated aim of the euro’s architects to create a currency that could “look the dollar in the face”.
The low point – or high point, from a US point of view – came in 2001 at $0.9. After that, the relationship went into reverse, with the euro steadily climbing back through parity to the $1.24 level in 2004, comfortably above its launch value.
The financial crisis of 2007 sent the euro surging against the dollar, perhaps because the credit crunch was thought to be an American problem – oddly, as it started at a French bank in the August of that year. The euro peaked at $1.47 in 2008, but a long decline then set in and the currency was down at $1.28 in 2012 before a brief rally sent it back to $1.33 in 2014.
It was trading in the early part of 2017 at about $1.06.
So in the 18 years of dollar-euro trading, the exchange rate has swung round by a total of 56 US cents, or just under 50 per cent of the euro’s launch value.
What are the factors that move the dollar/euro exchange rate?
In normal times, the driving factor would be the relative economic performance of the US and the euro area, as reflected in the official interest rates decreed by the Federal Reserve and the ECB. Thus a boom in the euro area could see the euro appreciate, at which point the ECB may raise rates – to cool down the boom – or cut them to make the euro less attractive, thus helping euro area exporters. The response to the financial crisis in terms of keeping rates at all-time low levels has complicated this relationship somewhat, but it remains the case that currencies respond, first, to economic performance and, second, to whatever action the authorities take in terms of interest rates.
What are the positive reasons for trading the dollar/euro?
It is a very liquid market. You will never be short of someone to trade with given the sheer size of these two currencies.
Inflation is low and stable in both jurisdictions. There’s no fear that the value of dollars or euros is going to be blown away in an inflationary gale.
This is an information-rich trading environment. There is no shortage of data on the economic and financial conditions in the US and the euro area, data that helps you decide trading strategies.
What you may wish to consider.
The dollar and the euro are fundamentally different. Two-thirds of world trade is dollar denominated, and key commodities such as gold and oil are priced in dollars. None of this is true of the euro.
The euro is prone to frequent crises, whether in Greece, Ireland, Italy or elsewhere. Its future is frequently said to be in doubt.
Foreign exchange trading is a zero-sum game. For every winner there has to be a loser. In a market dominated by professionals, that could be you.
How do I trade dollar/euro?
The old-fashioned way, exchanging one currency for another through a trading account with a financial services company or through your bank account.
Through futures and options, derivative products [link] that let you bet on exchange-rate movements without taking delivery of the currency itself.
By using contracts-for-difference (CFDs), in which you and a broker agree to pay the difference between the price of an asset on the day the contract is signed and the price on the day you have agreed to terminate the contract. Whichever of you has forecast correctly the direction the price will take is paid by the other. eToro offers trading in CFDs
Is trading dollar/euro right for you?
The dollar/euro trade provides opportunities for profit but can be a fast-moving market in which professionals frequently have the edge.
Why not drop in on some of eToro’s dollar/euro traders and find out what they think?
*This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation.
*Past performance is not an indication of future results. All trading carries risk. Only risk capital you're prepared to lose.