The Euro and the Euro Exchange Rate

The Eurozone which consists of 13 European states has one single unified currency, which is the euro. Aside from being the single currency for more than three hundred (300) million Europeans, the euro also has its influence to areas or countries whose currency is pegged to the euro, thus, directly affecting more than four hundred fifty (450) million people worldwide.

Last December 2006, it was estimated that there was around six hundred billion euros (€ 600 billion) circulated. This is equivalent to around eight hundred billion dollars (US$ 800 billion) calculated with the euro exchange rate at the time.

Countries Pegged to the Euro

Just like the US dollar, the euro also has several foreign currencies that were pegged to it. These currencies include: the Bosnia and Herzegovina convertible mark, the Bulgarian lev, the CFP franc, the CFA franc, the Comorian franc, and the Cap Verdean escudo. Hence, the euro is the official currency of the European states (13 states) and five (5) territories or states outside the union.

Moreover, there are twenty five (25) states and/or territories where there currencies are pegged to the euro including countries in mainland Africa, other five (5) European Union members which will eventually join the coalition, some French Pacific territories, two (2) African island countries, a Balkan country, Bosnia and Herzegovina.

The Euro was introduced in the year 1999 which replaced the European Currency Unit (ECU) with 1:1 ratio. The euro and the euro dollar exchange rate are managed by the European Central Bank (ECB) which is currently based in Frankfurt, Germany and the European System of Central Banks (ECSB) which is composed of the member states’ central banks.

The European Central Bank has the sole authority in terms of setting monetary policy which consequently affects the best euro exchange rate. However, the European System of Central Banks also participates in the production and the distribution of the notes and coins.

The Symbol, €

The Euro currency symbol was designed and created by Alain Biliet, a Belgian. The symbol is actually a combination of the Greek epsilon, which, according to the European Commission, symbolizes the weight of the European civilization; the “E” which stands for Europe; and the two parallel lines crossing through mean Euro’s stability.

The Euro Exchange Rate

The Euro is a free-floating currency, which means that the euro exchange rate regime is flexible, or floating. The European Central Bank actually just targets the interest rate rather than the exchange rate for euro. The European Central Bank does not intervene in the activities in the foreign exchange markets because according to the Mundell-Fleming model, the central bank should not maintain simultaneously the interest rate and the (euro) exchange rates since it will result in the currency’s depreciation.

The Euro is usually paired against another free-floating currency, which is the dollar. However, focusing on this currency pair may be subjective and misleading most especially if an observer views the rise of the euro exchange rate against the dollar is indicative of the global strength of the currency, however, it can also denote the weakening of the US dollar.

The Euro Exchange Rate Movements

When the euro was introduced to the financial market, the euro dollar exchange rate against other major currencies has fallen heavily, and most especially against the US dollar. In 1999, the dollar to euro exchange rate was at US$1.18 per euro but on October of 2000, the euro exchange rate fell to $0.8228 per US dollar. This was the lowest exchange rate for euro of all – time. The euro recovered in 2001 rising to $0.96 as its exchange rate but it fell again on July of the same year. The exchange rate for euro at that time was $0.8344, a little higher than the all-time low.

When the coins and notes have started to appear in 2002 and with the replacement of all currencies (national), the euro started to steadily appreciate. Since November 2003, the euro to dollar exchange rate has remained above $1.15 and no longer fell below $1.25 starting August of 2006. Last October 2007, the euro dollar exchange rate has reached $1.4299. Now, with the current US crisis, the euro dollar exchange rate is on the verge of breaking the $1.6 barrier.

Advantages of a Single Currency

Having a single currency among European Union member states removes the trade cost of exchanging money. In banking transactions, banks in the Eurozone must treat cross-border transactions as a simple domestic transaction, consequently lowering the consumer’s intra-member transaction fees.

Another advantage of a unified single currency is the price parity. The differences in prices of a certain product and/or level should decrease because of the ‘law of one price’. The price transparency across member states will allow consumers to find more affordable goods and/or services.

More Info on : Foreign Money Exchange | How to Send Money Order | International Wire Transfer Company | International Wire Transfer Services | International Wire Transfer