Perhaps one of the most significant developments in the foreign exchange market over the last ten or so years was the consolidation of the currencies of sixteen European countries (now know collectively as the Eurozone) into a single currency known as the Euro.

The idea of a common currency helping to unite the diverse people of Europe and to simplify commercial transactions among European countries had appealed to many residents and corporations of the region for years.

After attempting exchange rate regimes like the snake and Exchange Rate Mechanism or ERM of previous decades, the Euro eventually brought Europe considerably closer to the idea of a single currency in the 27 member European trading bloc.

A Brief History of the European Union

The European Union or EU was placed on a formal basis by the Maastricht Treaty which was enacted on the first of November in 1993, and it was based on the foundation laid by the European Community or EC founded by the Treaty of Rome in 1957.

Two years later, in 1995, the countries of Austria, Finland and Sweden joined the EU. Another ten countries joined the EU in 2004, and Romania and Bulgaria joined in 2007. At present in 2010, the European Union consists of a current total of 27 countries.

With an estimated population of more than 500 million people, the European Union generated an approximated 28% share of the nominal gross world project in 2009.

That amounts to roughly 16.5 trillion U.S. Dollars, and so it is probably no surprise that Europe's increasingly consolidated currency, the Euro, should have a considerable and growing influence on the global marketplace.

The Euro as a Reserve Currency

Since the inception of the Euro as an accounting currency in 1999 and as a circulating currency in 2002, a growing number of central banks around the world have begun to turn to the Euro as a replacement for the U.S. Dollar as a reserve currency.

Furthermore, citing concerns over high U.S. government spending and seemingly never-ending overseas wars, as well as the intransigent U.S. trade deficit, central banks have increasingly begun turning to the Euro as the next best reserve currency.

The Euro currently holds second place only to the U.S. Dollar as a global reserve currency, accounting for 28.1% of global currency reserves in 2009 and up from just 17.9% at the introduction of the consolidated currency in 1999.

During the same period, U.S. Dollar reserves fell from 70.9% to 61.5% of global official currency reserves.

International Trade Increases the Euro's Influence

Countries and their central banks will often hold the currencies of their major trading partners in reserve. This has made the U.S. Dollar an especially popular choice historically due to the United States' active status in the international trading markets.

Nevertheless, as Europe consolidates further, it becomes an increasingly influential trade partner and so a number of non-European countries with strong trade ties to Europe are considering pegging their currencies to the Euro.

Furthermore, citing concerns over high U.S. government spending and seemingly never-ending overseas wars, as well as the intransigent U.S. trade deficit, central banks have increasingly begun turning to the Euro as the next best reserve currency.

Of course, the U.S. Dollar still benefits as the primary currency in which key commodities like oil and gold are denominated. Nevertheless, certain oil-producing nations have indicated their wish to switch to selling oil in Euros.

This would very likely hurt the Dollar's status as a reserve currency even further in favor of the Euro, and would also tend to increase the Euro's influence on global markets.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.