[David Waring]

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In our last lesson we began our discussion on the Euro, with a look at the history leading up to the formation of the European Union and the criteria that had to be met before the Euro's launch. In today's lesson we are going to continue our discussion on the Euro, with a look at the introduction of the currency, as well as some of the factors which affect its long term fundamentals.

As we discussed in our last lesson, the Euro was launched as an electronic currency on January 1st 1999. As you can see from this chart, the markets initial confidence in the Euro, and really the European Union as a whole, was initially not very high. Over the next year the currency sold off from just above 1.1600 dollars to 1 Euro at its inception, to a low point of around .8200 cents to 1 Euro towards the end of 2000. While the tables have turned now in the Euro's favor, it actually took the European Central Bank intervening in the markets and buying Euros, to keep the currency from sliding further in 2000.

Click Here to Use These Charts Free of Charge with End of Day Data

The launch of the Euro was the largest monetary changeover ever, and as you can see, was not guaranteed success. As we touched on in our last lesson, getting a dozen countries, which varied widely in their economic and political clout, to give up control over their own monetary policy and switch to a more centralized monetary system, was no easy task.

As we learned about in module 8 of our basics of trading course, one of the most powerful tools that countries have to try and manage their business cycle is monetary policy, a tool which those adopting the Euro were essentially giving up. Although we have not seen a real test of this yet, you can imagine a situation where the economy of one of the major countries in the EMU such as Germany, goes into recession, but overall growth in the rest of the EMU is steady. If Germany were not part of the EMU, they could cut interest rates to try and bring their economy out of recession. Since they are however, their hands would be tied in this situation from a monetary policy standpoint, which may drive their economy deeper into recession than would otherwise be the case.

As we also learned about in module 8 of our free basics of trading course, countries have a second tool to manage the business cycle, which is Fiscal policy. As the EMU nations are still primarily independent from a fiscal policy standpoint, they do still have this in their toolbox. The issue here however, is that one of the ongoing requirements established in the Massstricht treaty for countries which join the EMU, is that member country's budget deficits must be less than 3% of GDP. So here again member nations are someone limited in what they can do to help their own economies, should it falter.

Of all the things to understand about the Euro from a fundamentals standpoint, it is this that is the most important, as it is here that a true test of the Euro, will eventually come.

So far I think most would agree that the Euro has been a resounding success, and since the original 12 countries replaced their currencies with the Euro as their paper currency in January of 2002, 3 more EU member nations have joined the EMU, and 5 other countries outside the EU have adopted the Euro as their official currency.

As a result of its success and the large combined economies that the currency represent, many feel that the Euro will one day replace the US Dollar as the premiere currency of the world. If you have thoughts on this I would love for you to share them in the comments section below.

Thats our lesson for today. In our next lesson we will look at the major economies of Europe which traders watch closely for fundamental direction in the currency so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

[KP FX Trader]

Have you heard that there was consideration of an Amero for the Americas? This may just be rumor. I haven't done any searching on it.
It seems to me one day all the Central Banks may get together and create one currency for the world. Have you ever thought of this? Do you think it is possible? If not or if so, why?
Thanks Dave. Your site is a great resource! Better than a book (I saw someone ask if you have considered writing a book. Personally I find the Video format more effective than reading only words on a page. It keeps me focused and I learn more easily.

[David Waring]

Hi KP FX Trader,

Yes I am familiar with the concept of the Amero.

It is my belief that the economic union which lead to the European Union and eventually the Euro, was formed in order to tie the economies of Europe who had a long history of wars with one another together, to make something like WW I and WW II less likely to happen in the future. Second to this was to make it easier to do business in Europe and to create an economic power on the level of the United States.

If the Euro proves successful over time, then I could see the argument being made that the US, Canada, and Mexico could combine currencies into one. It is my belief however that this is not a real enough possibility in the near term to the point where it affects the prices of the Peso, the Canadian Dollar, or the US Dollar, so it is not something that I pay attention to as a trader.

There are also people who believe that the Euro was formed as part of a move towards a one world currency and one world government, and that the next stage of that process is the Amero. It is from this group of people that you hear the most about this.

If it seems like the Amero is getting closer to becoming a real possibility then I would be willing to explore this side of things more. To be honest right now I don't look at it too hard as the people who hold this type of belief tend to be very negative and aggressive in discussion, to the point where I do not get a whole lot of value out of discussions where I try to learn more.

If you search on Youtube however, you will find no shortage of videos and conversations on the subject.

Best Regards,
Dave