The Euro is the official currency of the European Union. As the single currency for over 15 member nations, known collectively as the Eurozone (Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Spain), it directly affects over 320 million people.

The Euro is also used in a further 11 countries, while others have currencies 'pegged' to the Euro.

Consequently, the Euro affects over 500 million people and has the largest cash circulation in the world. At present, the UK and Denmark have each negotiated with the EU to retain their own currencies, while Sweden declined to adopt the Euro in a referendum in 2003.

The Euro is managed and administered by the European Central Bank (ECB), based in Frankfurt, and the Eurosystem, a collective of Central Banks from Eurozone member nations. Although a common market place has been the objective of EU members since 1957, this goal came to fruition with the 1992 Maastricht Treaty which provided the legal framework for the single EU currency and the founding of the ECB.

The Euro was introduced in 1999, initially as an accounting currency, with physical notes and coins coming in to circulation on the 1st of January 2002. The symbol for the new currency was designed by Belgian Alain Billiet, and according to the European Commission:

Inspiration for the € symbol itself came from the Greek epsilon (Є) - a reference to the cradle of European civilisation - and the first letter of the word Europe, crossed by two parallel lines to 'certify' the stability of the euro.

Since its inception the Euro has rapidly established itself as a heavyweight in the global foreign exchange market. At present it is second only to the US Dollar in terms of international strength and stability.

Economics

The benefits of a common marketplace have long been exalted by economists. By negating fluctuations in exchange rates between neighboring countries, the adoption of a single currency allows greater and more profitable, trading among neighbors. Within the Eurozone, international payments are considered domestic. Greater price parity has also been achieved among nations, and macro-economic stability has occurred as the Euro has delivered improved liquidity, flexibility and stability for both national economies and the region as a whole.

Because low inflation is a hallmark of economic stability, this has become the central concern of the ECB. The ECB operates independently of its member nations and unlike its US counterpart, the Federal Reserve, does not have the secondary concerns of sustained growth and employment within its mandate.

Its unique status as a common currency means the Euro is only as strong as its member states. Consequently, membership of the Eurozone brings with it strict criteria regarding economic stability and budget deficits, as outlined in the Maastricht Treaty.

Since 1999, low inflation and stability have made the Euro attractive to investors and it is now the world's second largest reserve currency after the US Dollar. By the end of 2006, more than one quarter of foreign exchange holdings were in Euros, up from 18% in 1999. At present, the Euro is the second most active currency in terms of foreign exchange, accounting for around 40% of global daily transactions.

Influences

The Euro is a floating currency and as such, is characterised by fluctuations in its foreign exchange rate.

After its introduction in 1999, the Euro was heavily devalued on foreign exchange markets, particularly in relation to the US Dollar. Making an initial appearance at US$1.18/€, the Euro dropped to $0.8228/€ by 26 October 2000. However with the implementation of the physical currency in 2002, the Euro began to appreciate and has since retained its international value.

The strength and size of its member nations, the status of the Euro as a reserve currency and its prominence in international political organizations, ensure the Euro will retain its international strength.

Future

Widespread volatility is likely to characterise markets for some time as nervous investors, low market confidence and reactive markets make forecasting foolish at present. Throughout the credit crunch, the Euro has fluctuated widely and change will be the only constant in the short-term as financial news emanating from the US will continue to shape global markets.
However, the Euro is likely to retain its international value, and has even fared well despite the credit crunch, as its strength and stability have been sought as a safe haven for risk adverse investors. The diversity of the Euro's constituent nations will also help the currency to weather the international storm.

Euro - United States Dollar - last 12 months

Source: http://newsvote.bbc.co.uk

Throughout the recent crisis, the ECB has worked in conjunction with the Federal Reserve and Bank of England to ensure international liquidity in the financial sector. Barclays' analysts argue weakness in the Eurozone has been exaggerated, with some appreciation expected once oil prices have stabilised and a picture of growth prospects becomes clear.

Economic slowdown in the Eurozone is apparent, and Ireland has recently tipped into recession while Spain and Germany seem to be teetering on the brink. As global demand is reduced, particularly from the US and the UK, European products may struggle to find markets, but conversely, a lower value currency will increase their export competitiveness. Declining oil prices have also helped to relieve inflationary pressures.

It will be interesting how the euro handles the global financial pressures over the coming months. However as is always the case with markets, volatility and fluctuations always provide favourable conditions for someone, somewhere. Information and expert advice on when to trade is key.

This blog was provided courtesy of Currency Solutions.

Currency Solutions are experts in the currency markets and will help you achieve an exchange rate at the most opportune time thus ensuring you will receive more for your money.

Contact Currency Solutions for all your currency exchange needs »

Are Berbatov and Robinho the only ones with money in the bank this week?

Darling doesn't seem to have any, I certainly never have any - maybe magic boots are the only way to insulate yourself against financial oblivion? After signing with Manchester United for a whopping £30.5m this week, perhaps Berbatov could teach Darling a thing or two about economics, or at least about asset valuation!

Darling's comments in the Guardian last weekend, yes the "60 years" ones, can be regarded as the political equivalent of turning your pockets out to reveal lint and a few pence rattling around in there.

Image is everything in politics and the negative press following this interview has depressed the pound even further this week as confidence sinks to an all time low.

While famed for his pragmatism and ability to get the job done, Darling's searing honesty was interpreted as a virtual 'abandon ship' by currency traders as they dumped the Pound in favour of offshore currencies, sending Sterling into a freefall.

Exploring new lows virtually every day this week, the pound dropped £0.8144 against the euro and $1.770 against the dollar on Wednesday, rounding off a decline of 10% in just one month.

Conspiring to keep the pound weak has been the raft of negative data released.

OECD forecasts singled out the UK as only economy from the G7 group to face recession. Sterling faced a 12 year low in a trade weighted index for the 10th consecutive month and PMI data showed contraction construction, service and manufacturing sectors across the board.

The housing market struck a similarly bleak tone, with new home loans for July the lowest in 9 years and house prices declining 10% since the beginning of 2008.

In response to the domestic situation the MPC decided to keep interest rates on hold at present, maintaining the base lending rate of 5%. The pound trimmed its losses slightly on Thursday following this decision, recovering against the Euro and the US Dollar but remains on the edge of uncharted territory.

But as there are always winners and losers in the currency game, the depreciated pound has created a veritable bonanza for buyers of the currency.

If you are looking to change your Euros back to Sterling, now is a great time to act!

In the Eurozone this week, news has been similarly grim.

On Thursday the ECB also opted to keep interest rates unchanged at 4.25% and ECB president Jean-Claude Trichet, having obviously learned nothing from the Darling incident, commented that the Eurozone is experiencing an "episode of weak activity".

In addition, Luxembourg Finance Minister Jean-Claude Juncker's claims the Euro is "effectively overvalued" at present led the Euro to fall for the first time in 8 days against the Pound as well as against the US Dollar and the Yen.

With the ECB revising growth predictions for 2008 and 2009, proceed with caution seems to be the message with the euro at the moment. Your dealer can keep you updated on the situation as and when it changes.

It has been a relatively quiet week for US markets. The Indian summer for the Dollar continues, coinciding with contraction in European and Asian economies as they follow in the wake of the US credit crunch. Hurricane Gustav in the Gulf of Mexico has been tempering the price of oil which is further supporting the dollar.

In other markets, the Reserve Bank of Australia's decision to lower interest rates has deflated the Aussie dollar this week, taking the Kiwi down with it. The Slovak Koruna has recovered from its 5 month low against the US Dollar and the pick of foreign currencies remains the Yen as it continues to benefit from credit nervousness and risk aversion internationally.

Have a good weekend!

Currency Solutions are experts in the currency markets and will help you achieve an exchange rate at the most opportune time thus ensuring you will receive more for your money.

Contact Currency Solutions for all your currency exchange needs »

The world of currency exchange is fraught with pitfalls. We asked Nigel Hodges of Currency Solutions to offer some sound advice to investors. Nigel came up with this five-pronged guide to finding the best deals...

For investors in overseas property, making the wrong currency exchange choices could add as much as £7,000 to your costs.

Avoid the high street bank sting

Perhaps the biggest potential pitfall, and by no means is currency exchange alone here, is approaching the high street bank.

Typically banks offer only excessive rates of exchange, characterised by large margins and even larger spreads.

On top of that, bloated commission and transfer charges can really drive up costs, while processing payment can be infuriatingly slow.

Look for a specialist instead. Their rates will be far more competitive because profit is made by trading in large volumes rather than via excessive commission charges or fees.

So, where a bank may offer €1.31 per £1, a specialist will offer around €1.35 - a considerable difference.

In addition, a specialist is also likely be far more knowledgeable on currency exchange procedures than their high street bank counterpart and will be better placed to save you money.

Remember the foreign rule

Sidestepping UK banks is only half the job - some foreign banks charge a premium to receive funds, which can prove an expensive and very unwelcome surprise.

For many EU countries - those that accept euros - this can be avoided by sending payment in installments of less than €50,000, but another option is to ask your sending (UK) bank to take on the charges (the term to use here is 'our').

Although this won't eliminate the charge entirely, it will be significantly less.
Other options include sending the funds to the account of an overseas solicitor (which most allow free of charge), or seeking the advice of a currency specialist, who should know how to avoid foreign bank charges.

Leave time, save money

Another pitfall is the possible extra charge pending should a receiving bank fail to process payment quickly enough. The key here is to leave plenty of time for a currency transaction to take place.

But how long is 'plenty'?

Well, the amount of time it can take varies according to a number of factors, including type of currency - euros can take up to two days to reach a destination bank while Polish zloty can take anytime between one and three days.

But the reality is it is very difficult to know exactly when a receiving bank will process your funds.

As a guide, you should allow a minimum of three days for euros and five days for exotic currencies.

Also, it can be helpful to get hold of what is known as a SWIFT receipt from the bank or currency specialist that is sending your payment.

Developers will likely be more flexible with funds not arriving on deadline if they have proof they are on their way.

Guard against a market slump

Market fluctuations are a worry for many property investors, but they needn't be.

Take advantage of a bull market by pre-booking your currency exchange anytime up to two years before you'll need the funds.

The transaction will be done at the rate quoted to you at the time you arranged the booking, even if the market has since dropped.

The only downside here is that, should interest rates improve for the investor, they would be locked-in to the original deal. The upside speaks for itself: immunity from a rate drop.

For pre-booking, also known as a forward contract, 10% of the trading amount is required up front with the rest due on the date of the trade.

Clients can put the 90% in a high-interest account safe in the knowledge they have preserved their profit margins for the exchange.

A specialist can offer a fixed forward contract, where you know the exact date you will need the funds, or a flexible forward contract, where the completion date may change.

Note though, the flexible option is only available on major currencies such as the euro and US$.

You've bought, now you want to sell?

Being aware that foreign banks can demand margins bigger even than their UK counterparts when you sell your property can be a huge advantage.

In some countries banks even calculate their charges as a percentage of the whole transfer amount, which can be costly.

Remember as well to make sure that you know how to move your funds once you open an overseas bank account.

You don't want to open an account in Romania and then have to fly there out there each time you want to do a transfer.

A currency specialist will be able to use their in-house knowledge and expertise to help you avoid getting ripped off by foreign banks when sending funds back to the UK.

Nigel Hodges is Senior Currency Executive with Currency Solutions

To find out more about Currency Solutions and how they can help you, click here.