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The Euro Invasion

By : Kristien Wilkinson
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It has been declared by several economics and finance luminaries that the euro could very well be the next main currency reserve, toppling the US dollar from its revered position. No less than former Federal Reserve Chairman Alan Greenspan and Nobel Prize winner Robert Mundell have said that the unified monetary unit of the European Union could pose a serious challenge to the US currency.

The concept of an economic and monetary union for European countries has been in the works since the 1950s. The euro itself was conceived in 1992 through the Maastricht Treaty and was adopted as official currency of 11 countries in 1999. Two years later, the euro entered circulation in the financial systems of Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland.

Today, the EU currency is gaining ground as a major international currency after less than a decade of existence. It is involved in about 37 percent of transactions in the foreign exchange markets and is the second most commonly held reserve currency after the US dollar, making up one-fourth of the global reserves. It is believed that the euro inherited its strength from the German Deutsche mark, which also occupied a similar position after World War II.

The euro proves to be much greater than its predecessor though as it edges into becoming a major currency in the oil trade. For the longest time, oil has been exclusively traded in US dollars. Although the euro and yen have been gradually gaining access, the oil trade is still primarily dominated by the American currency. Speculations place oil sales in euro at 30 to 40 percent.

One of the technical difficulties involved in establishing a euro-denominated oil trading system is the absence of a standard pricing system or a euro-based oil marker. So far, the three oil markers in the industry namely West Texas Intermediate, Norway Brent, and the UAE Dubai crude are all dollar-denominated.

In 2005, it was reported that Iran was planning to put up an oil bourse that would trade petroleum, petrochemicals, and gas in non-dollar currencies, particularly the euro. This would establish a fourth oil marker that would pave the way for a euro-denominated trading system. Several dates have been set for the opening of the bourse but the launch itself has been postponed repeatedly. Iran has pushed ahead with its currency reserve diversification though and has accepted the euro and the Japanese yen as payments for its oil exports.

As of now, the euro remains strong in the forex market since it started appreciating in 2000. It has not fallen below parity with the dollar since 2002 although this can be credited to the intrinsic depreciation of the US currency. It also helps that the European Central Bank (ECB) is adamant on increasing interest rates to counter inflation.

The relative strength of the euro has caused fears of a decrease in European exports as US goods become cheaper and thus, more attractive. There have been official complaints and calls for the US to do something about the falling the dollar but the ECB itself currently shows no signs of cutting interest rates to offset the euro's exchange rate.

Meanwhile, the euro nations or Eurozone has increased since 2001. In January 2007, Slovenia joined the Eurozone and on 2008, Malta and Cyprus are set to follow suit. Other East European countries are also aiming to adopt the euro as official currency but are still struggling to meet the standards for membership.



About the author:
Kristien Wilkinson is an online writer and contributor to forexmarkets.com" target=_blank>http://www.forexmarkets.com


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