What Is the Euro to U.S. Dollar Conversion?:
How the Exchange Rate Converts Euros to Dollars:
A currency's forex value depends on a lot of factors, including central bank interest rates, the country's debt levels, and the strength of its economy. Based on these factors, forex traders decide whether they think the currency will increase in value, which happens when economic growth is strong or when interest rates are rising. These traders bid the price up. Other traders read the same data, but decide the value of the currencies will decline. They bid the price down. The complex interaction of these factors decides the currency's price at any given moment.
Despite this volatility, most countries allow their currencies to be determined by the forex market. This is known as a flexible exchange rate. That's because, even if the currency isn't traded, these same factors put pressure on a currency. To keep the rate fixed, the country has to buy and sell the currency itself. This can cause the country to hold too much of another country's currency. For a great example of how this happens, see China's Yuan and the Dollar Exchange Rate.
History of Euro to Dollar Conversion:
2012 - The worsening eurozone debt crisis pummeled the euro, as many wondered whether the eurozone itself would survive. The euro started the year at $1.274. It rose briefly to a high of $1.3452 in February, as investors were calmed by an intergovernmental treaty agreed to in December 2011.
However, the euro began falling as the Greece debt crisis worsened. In May, the government was put on hold when neither party won enough votes to elect a President. By the end of May, the euro fell to $1.2364. The future of Greece's membership in the eurozone was uncertain until a pro-bailout President was elected on June 17. The euro rose briefly to $1.27 on June 20, but started falling immediately afterwards as the interest rates for Spanish and Italian bonds rose to the unsustainable 7% level. As of July 21, the euro was only worth $1.2176.
2011 - The euro started the year at $1.3371. It rose to a high of $1.4675 in July, for two reasons. Investors left the dollar thanks to the U.S. debt default crisis. At the same time, the European Central Bank (ECB) raised its key interest rate to 1.5%. This raised bank rates for anyone lending or saving in euros, thus raising the value of the currency itself.
As soon as the U.S. debt crisis was somewhat resolved, investors then fled the euro in response to a flare-up of the Greece debt crisis. This created doubts about the EU's financial strength, and even the future viability of the euro itself. By October 2011, the euro's value had dropped to $1.3294. It rose briefly as EU leaders met to resolve what had now become the eurozone crisis, but by December, it was back to $1.33.
2010 - The euro started the year at $1.4419. However, it dropped 17% against the dollar, hitting a low of $1.20 on June 10. Investors were worried about the weakness of the EU's economy. It rose to $1.42 by November, as the EU economy showed renewed signs of strength. This confidence didn't last, and the euro ended 2010 at $1.3269.
2009 - The euro started the year in a strong position, at $1.3946. It then fell to the year's low of $1.2545 as the ECB increased its rate to 1.5%. This time, investors were concerned that the ECB was raising rates prematurely, heading off any chance of an economic recovery in Europe. The risk of renewing a recession offset the chance of a higher return in holding euros, or euro-denominated bonds or investments.
The ECB realized its strategy backfired, and began lowering its prime rate. As a result, the euro rose 20% (March 3-December 1). In addition, investors' fears about the (at that time) $13 trillion U.S. debt caused them to flee the dollar and dollar-denominated bonds. By the end of 2009, the euro was worth $1.4332.
2008 - The euro started the year at $1.4738, since investors still thought the subprime mortgage crisis would be confined mostly to the U.S. However, as soon as they realized the recession was going global, the euro fell to $1.3919, as businesses hoarded dollars during the 2008 financial crisis.
2002 - 2008 - The euro rose 63% in just six years the U.S. debt grew 60%. In January 2002, a euro was worth a little more than $.90. By the end of 2007, its value had skyrocketed to $1.4718.
2000 - 2002 - The euro traded in a narrow range, between $.87-.99, rarely breaking above a dollar, until it was officially launched as a currency. Until 2002, it was used only for electronic transactions. (Source: Federal Reserve Bank of New York, Historical Exchange Rates)
Article updated July 24, 2012
