EUR to USD: What Moves the Euro Against the Dollar?

EUR/USD is the most traded currency pair in the world, accounting for around 23% of daily global forex turnover. The combined economic weight of the Eurozone and the United States — and the depth of the capital markets between them — makes this pair uniquely important. Understanding what drives it helps make sense not just of the EUR/USD rate itself, but of the broader global forex market.

The ECB and the Federal Reserve: the primary driver

The single biggest factor in EUR/USD movements is the relative monetary policy stance of the European Central Bank (ECB) and the US Federal Reserve. When the Fed raises interest rates more aggressively than the ECB, US dollar assets become relatively more attractive to global investors, demand for USD rises, and the EUR/USD rate falls (meaning one euro buys fewer dollars). When the ECB leads or catches up, the euro tends to recover.

The interest rate differential — the gap between benchmark rates in the Eurozone and the US — is closely watched as a predictive indicator. When that differential moves in favour of the dollar, EUR/USD tends to fall. When it moves in favour of the euro, EUR/USD tends to rise.

Market expectations matter as much as actual rate decisions. If traders expect the Fed to cut rates in the coming months while the ECB stays on hold, EUR/USD often rises in advance of the actual decision — because markets price in future policy, not just current policy.

Eurozone economic data

Beyond central bank decisions, a range of economic data releases move EUR/USD on a day-to-day basis. GDP growth figures for major Eurozone economies (Germany, France, Italy, Spain), inflation data (the HICP measure that the ECB targets), unemployment rates, and the ZEW and IFO sentiment surveys all influence the rate when they surprise relative to market expectations.

Germany's economy carries particular weight. As the Eurozone's largest economy, a German recession or manufacturing slowdown (Germany is one of the world's largest goods exporters) has a disproportionate effect on the euro. German industrial orders and PMI (Purchasing Managers' Index) data are closely watched.

The 2022 parity event

In July 2022, EUR/USD fell below 1.00 for the first time since 2002 — a moment that attracted significant attention globally because parity (equal exchange between the two currencies) had been considered a psychological floor for most of the euro's history. The pair briefly touched 0.9636 in September 2022.

The causes were straightforward: the Fed was raising rates at its most aggressive pace since the 1980s, while the ECB was slower to respond. At the same time, Russia's invasion of Ukraine had created an energy crisis in Europe, dramatically raising European energy import costs (paid in dollars) and worsening the Eurozone's trade balance. The combination of a hawkish Fed, a hesitant ECB, and an energy-shocked Eurozone pushed EUR/USD to multi-decade lows.

The pair recovered through 2023 as the ECB caught up with rate rises and US inflation began to moderate, returning to a more typical trading range above 1.05.

The dollar's reserve currency status

The US dollar is the world's dominant reserve currency — around 58% of global foreign exchange reserves are held in USD. This gives the dollar a structural bid that no other currency has. In periods of global financial stress, demand for dollar liquidity spikes (because international trade and debt is largely denominated in USD), which pushes EUR/USD down even when the stress has nothing directly to do with the US economy.

This dynamic played out clearly in the early stages of the COVID-19 pandemic in March 2020: as global markets seized up, EUR/USD initially fell sharply as institutions scrambled for dollar liquidity, before reversing once the Fed flooded markets with dollar supply through swap lines with other central banks.

Trade flows and current accounts

The Eurozone runs a significant current account surplus — it exports more goods than it imports (particularly Germany). This structural surplus means there is ongoing demand for euros from trading partners paying for European goods, which provides underlying support for the currency over the long run. The US, by contrast, runs a persistent current account deficit, which creates structural downward pressure on the dollar — though this is partially offset by capital inflows into US financial assets.

This article is for informational purposes only and does not constitute financial advice. Exchange rates fluctuate continuously; past price levels are not indicative of future performance.