Forecast 2021: What To Expect From The Euro And The Dollar

Forecast 2021: What to Expect from the Euro and the Dollar1

If someone asks which currency pair is the most important and most liquid on Forex, the answer will follow immediately. Even a beginner will say: “Of course, EUR/USD”. There is even nothing to doubt about this: the trading volume for this pair reaches $1.1 trillion per day. These currencies represent two of the world's most powerful economies, and the US dollar is the first most important reserve currency. Most central banks continue to store large volumes of their gold and foreign exchange reserves (over 60%) in US dollars (UUP, UDN). The euro (FXE) comes in second with over 22%.

It should be noted that the dollar is gradually losing its positions, according to Bloomberg, its peak (45.3%) in global payments was in April 2015. Now, following the SWIFT statistics, the euro has managed, although not by much, to bypass the dollar. In October 2020, 37.8% of money transfers served by this system were in the euro, while the share of the dollar was 37.64%. (The British pound took the third place with a huge margin with 6.92%).

Despite the weakening US currency, it is certainly too early to bury the dollar. The Bank for International Settlements (BIS) announced in the summer of 2020 that about 50% of cross-border loans and international bonds are denominated in USD. Finally, about half of all trade invoices in the world are issued in dollars, even for non-US trade.

And let's not forget that market analysts evaluate the strength of different currencies by looking at the US Dollar Index (DXY). In fact, this is a basket of monetary units of six countries, the value of which is compared with USD. And the euro takes the lion's share of 57.6% in it (the remaining 5 account for only 42.4%).

All the above statistics indicate unambiguously that EUR/USD is number 1 among the major pairs on Forex. It is this pair that sets the main trends for other currencies. And that is why it is necessary for every trader to know and understand whatever happened to it, is happening and will happen.

A Bit of History

Surprisingly, despite its importance, the EUR/USD pair is quite young. The euro appeared thanks to the creation of the European Union in 1992, first in non-cash form, and it was only on January 1, 1999 that it officially replaced the rest of the European currencies. A few more years passed and in June 2002 the EUR became the sole means of payment in the Eurozone, displacing the then favorite, the German mark (USD/DEM) from the pedestal.

This event was preceded by two others, which had an important influence on the formation of the subsequent EUR/USD exchange rate. The first is a cut in interest rates by the US Federal Reserve in late 2000, and the second is a series of four coordinated terrorist attacks, the largest in the history of mankind, committed in the United States on September 11, 2001, including the destruction of the twin skyscrapers of the World Trade Center in New York. As a result, having started from the rate of 0.93 dollars per euro, by the middle of 2008 the pair rose to the level of 1.60. In other words, the dollar has lost more than 70% against the euro.

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