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The relationship between the US Dollar (USD) and the Euro (EUR) represents the main axis of the global financial system. Together, the two currencies account for the vast majority of international trade settlement and central bank reserves.
The US Dollar has served as the world's primary reserve currency since the Bretton Woods Agreement of 1944. Currently, over 58% of allocated foreign exchange reserves are held in USD. The Euro, introduced in 1999, stands as the second-largest reserve currency, accounting for about 20% of global allocations.
While the USD is backed by a single country's federal government and central bank (the Federal Reserve), the Euro is backed by the collective economic output of 20 Eurozone nations, managed by the European Central Bank (ECB). This creates unique political and monetary challenges for the Euro, as it must reconcile the fiscal differences between sovereign states.
The EUR/USD currency pair is the most traded pair in the world, serving as a primary indicator of economic health and risk appetite. When global markets face turmoil, capital frequently flows back into the US Dollar due to its perceived safety, impacting the EUR/USD exchange rate.
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