The world of foreign exchange has had its own version of a reality series appearing center stage on every trader’s monitor for the past decade. The “EUR/USD” currency pair is the highest volume traded pair, the most visible, and with a short history since the Euro never existed before 1999. Perhaps, it was a thought in the minds of many European officials and discussed at cocktail parties for years, but its creation and the battle for supremacy that commenced was a direct frontal assault on the globe’s leading reserve currency, the greenback, right from the start.
Shades of Marlon Brando claiming, “I could have been a contender!” seem most appropriate at this juncture, since the ascendancy of the Euro for the past ten years was finally tested in 2010, as many felt it would be back when its formation became a done deal. The pricing trends presented in the following chart tell the compelling story, one for the history books and definitely worthy of a Hollywood script or TV series at the least:
When the Euro was finally introduced as a regional “experiment” to put European economies on par with its primary competitor, the United States, it followed a long history of star-crossed attempts to legislate currency exchanges by governmental proxy, rather than submit to the vagaries of global market forces. The Bretton-Woods accords brought us the “adjustable peg” system after World War II to complement the Marshall Plan rebuilding of Europe.
Attempts to peg currencies to a Gold standard collapsed in 1968, giving way to a floating-rate system, but Western Europe tried once again to stabilize its currencies as a group by inventing “the Snake”. By 1979, the serpentine solution was replaced by the European Monetary System, or EMS (does anyone remember the “Ecu”?), doomed to failure from the start.
The formulation of the Euro seemed to many as just one more failed attempt at market manipulation, but once national currencies were disbanded and destroyed, there was no going back. However, the one ringing comment at the time was, “Would German bankers raise interest rates on everyone if there was a crop failure in Spain?”, an opinion that political forces would meet their match when market realities prevailed.
Fast forward to the end of 2009. After nearly recovering its pre-recession strength, news headlines began to foretell that there were significant debt problems in Greece, the weakest member state in the European Union from an economic perspective. When the crisis fully broke, the Euro had descended from its once lofty perch of .60 down to .18. Forex market trading of the Euro when introduced commenced at a similar value, then dropped to .85 where most analysts thought it should rest, but from late 2000, the Euro marched in a constant upward trend to .60 in 2008.
Talk of replacing the U.S. Dollar as the world’s number one reserve currency has all but disappeared from forex news discussions. The greenback, battered and humbled, has regained some of its pride as the exchange rate nestled into the .30 to .40 trading range. Persistent debt problems in Europe and related deficit issues is the U.S. will more than likely prevent either currency from dominating the other for some time.
The basic issue for Western democracies, the developed countries of the world, is how to stimulate domestic growth in their native territories when all eyes are fixed on Asia and developing countries for growth prospects. Growth will produce tax revenues that will reduce deficits and strengthen national currencies. Sounds simple enough, but no one wants to swallow the medicine.
President Obama’s bipartisan committee on reducing the deficit recently released their preliminary proposals, none of which were supported by the political powers that be. Marches in London protest proposed measures there as well. Economic war will be upon us if major financial solutions are not immediately forthcoming.
Source | The Currency Forecasting Blog (CFB) | http://currency-forecasting.blogspot.com/2010/11/eurusd-currency-trading-pair-woulda.html
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