Why Trading in EURUSD Pair ?

The United States and the European Union are the two largest economic powers in the world. The U.S. dollar is both the world's most heavily traded and most widely held currency. The currency of the European Union, the euro, is the world's second most popular currency. And since it contains the two most popular currencies in the world, the EUR/USD pair is forex's most actively traded currency pair.

The European Union Economy
Overall, the European Union represents the world's largest economic region with a GDP of more than $13 trillion. Much like the United States, the economy of Europe is heavily focused on services, manufacturing, however, represents a greater percentage of GDP in Europe than it does in the United States. When economic activity in the European Union is strong, the euro generally strengthens; when economic activity slows, as expected, the euro should weaken.

Why the Euro Is Unique
While the U.S. dollar is the currency of a single country, the euro is the single currency of 16 European countries within the European Union, collectively known as the "Eurozone" or the European and Economic Monetary Union (EMU). Disagreements arise from time to time among European governments about the future course of the European Union or monetary policy and when these political or economic disagreements arise, the euro can be expected to weaken. (To learn more about why the euro is so important, see Top 8 Most Tradable Currencies.)

Factors Influencing the Direction of the EUR/USD
The primary issue that influences the direction of the euro/U.S. dollar pair is the relative strength of the two economies. Holding all else equal, a faster-growing U.S. economy strengthens the dollar against the euro, and a faster-growing European Union economy strengthens the euro against the dollar. As previously discussed, one key sign of the relative strength of the two economies is the level of interest rates. When U.S.interest rates are higher than those of key European economies, the dollar generally strengthens. When Eurozone interest rates are higher, the dollar usually weakens. However, as we've already learned, interest rates alone can not predict movements in currencies.

Another major factor that has a strong influence on the euro/U.S. dollar relationship is any political instability among the members of the European Union. The euro, introduced in 1999, is also relatively new compared to the world's other major currencies. Many economists view the Eurozone as a test subject in economic and monetary policy. As the countries within the Eurozone learn to work with one another, differences sometimes arise. If these differences appear serious or potentially threatening to the future stability of the Eurozone, the dollar will almost certainly strengthen against the euro.

The list below shows the current members of the Eurozone as of January 1, 2009. When trading the euro/U.S. dollar pair, investors should carefully watch for troublesome economic and political news originating in these countries. If several Eurozone countries have weakening economies, or if newspaper headlines are discussing political difficulties among the countries in the region, the euro is likely to weaken against the dollar.