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I've never understood why EUR/USD "parity" is a concept. It seems analogous to two stocks having the same share price - a totally arbitrary number that happens

I've never understood why EUR/USD "parity" is a concept. It seems analogous to two stocks having the same share price - a totally arbitrary number that happens to be equal. Am I wrong?

Armisael16 4y ago
No, that’s an accurate way to look at it. The important thing is the relative movement, not the precise value (the US economy would not be meaningfully different if we cut a zero of the end of every price). Psychological effects can come into play, of course.
- pawsforthought 4y ago
  Notably, the supply of Bitcoin was supposedly calibrated such that dollar-parity would be relatively quickly achieved, and there were indeed headlines made, despite it being a totally arbitrary milestone.
jonny_eh 4y ago
You're not wrong but as far as arbitrary comparisons go, them being at parity is a historical anomaly.
- throwaway1777 4y ago
  This has happened in the past, but the most recent time was 2000-2002
  - Gare 4y ago
    And Euro was introduced in 1999.
rutierut 4y ago
Yes, I don't need to pay for my eBay purchases in Tesla stock. This conversion rate has a financial impact on a lot of people. But also you're right.
lukeqsee 4y ago
Mostly correct. It differs from your analogy because you can't (usually) directly trade two stocks against each other, but it's purely arbitrary. Unfortunately, we humans are very psychologically affects by what appears to be arbitrary reasons. :)
deleted 4y ago
[deleted]
jfengel 4y ago
The euro price was originally set deliberately to fall between the pound and the dollar. They could have set any price, but they picked that one with the intention that it would usually be a bit more than a dollar. There's nothing special about it being worth less than a dollar; it's an arbitrary mark not unlike a year ending in zero. But it only happens when the euro is significantly weaker than it was intended to be.
- onlyrealcuzzo 4y ago
  > But it only happens when the euro is significantly weaker than it was intended to be. This isn't how central banks value their fiat currency. If for some reason the Fed puts 20% interest on the USD, the value of the USD would increase dramatically. The Euro is under no obligation to set its value with respect to the USD or the Pound. There is no "intended" value of the Euro with respect to other currencies. There's an "intended" value of the Euro with respect to keeping European governments solvent and keeping prices steadily increasing. If the Euro has to drop to $0.01 to achieve those goals, it will. If it has to climb to $100 to achieve those goals, it will.
  - jfengel 4y ago
    It was "intended" when the price was originally set. The goal was that the European economy would keep its ratio to the US roughly the same. Central banks do have some thumb on that scale, but as you say, it's entirely about keeping the economies healthy, not maintaining any specific ratio to other currencies. If it has fallen so far that the ratio is 1.0, that's not a problem for the currency itself, but it does happen because the economy is struggling more than the American economy is.
    - kergonath 4y ago
      > It was "intended" when the price was originally set. The goal was that the European economy would keep its ratio to the US roughly the same. This is just a baseless assertion you’ve made repeatedly. You should provide some source and be a tad less aggressive about it if you want to be convincing.
solarmist 4y ago
It’s also useful for travelers getting a sense of prices.
aabhay 4y ago
What matters is the movement of prices over time. So if one stock was 20% higher in price than another yesterday, and today they're the same, then that's a big signal. We aren't interested in parity for the sake of parity itself.
jakub_g 4y ago
The difference is that "EUR/USD exchange rate" is a well-defined, known & real thing, tracked & used by millions of people and companies for doing business; whereas no one tracks "GOOG/MSFT exchange rate".

I've never understood why EUR/USD "parity" is a concept. It seems analogous to two stocks having the same share price - a totally arbitrary number that happens to be equal. Am I wrong?

Armisael16 4y ago

No, that’s an accurate way to look at it. The important thing is the relative movement, not the precise value (the US economy would not be meaningfully different if we cut a zero of the end of every price). Psychological effects can come into play, of course.

pawsforthought 4y ago
Notably, the supply of Bitcoin was supposedly calibrated such that dollar-parity would be relatively quickly achieved, and there were indeed headlines made, despite it being a totally arbitrary milestone.

jonny_eh 4y ago

You're not wrong but as far as arbitrary comparisons go, them being at parity is a historical anomaly.

throwaway1777 4y ago
This has happened in the past, but the most recent time was 2000-2002
- Gare 4y ago
  And Euro was introduced in 1999.

rutierut 4y ago

Yes, I don't need to pay for my eBay purchases in Tesla stock. This conversion rate has a financial impact on a lot of people. But also you're right.

lukeqsee 4y ago

Mostly correct. It differs from your analogy because you can't (usually) directly trade two stocks against each other, but it's purely arbitrary. Unfortunately, we humans are very psychologically affects by what appears to be arbitrary reasons. :)

deleted 4y ago

[deleted]

jfengel 4y ago

The euro price was originally set deliberately to fall between the pound and the dollar. They could have set any price, but they picked that one with the intention that it would usually be a bit more than a dollar. There's nothing special about it being worth less than a dollar; it's an arbitrary mark not unlike a year ending in zero. But it only happens when the euro is significantly weaker than it was intended to be.

onlyrealcuzzo 4y ago
> But it only happens when the euro is significantly weaker than it was intended to be. This isn't how central banks value their fiat currency. If for some reason the Fed puts 20% interest on the USD, the value of the USD would increase dramatically. The Euro is under no obligation to set its value with respect to the USD or the Pound. There is no "intended" value of the Euro with respect to other currencies. There's an "intended" value of the Euro with respect to keeping European governments solvent and keeping prices steadily increasing. If the Euro has to drop to $0.01 to achieve those goals, it will. If it has to climb to $100 to achieve those goals, it will.
- jfengel 4y ago
  It was "intended" when the price was originally set. The goal was that the European economy would keep its ratio to the US roughly the same. Central banks do have some thumb on that scale, but as you say, it's entirely about keeping the economies healthy, not maintaining any specific ratio to other currencies. If it has fallen so far that the ratio is 1.0, that's not a problem for the currency itself, but it does happen because the economy is struggling more than the American economy is.
  - kergonath 4y ago
    > It was "intended" when the price was originally set. The goal was that the European economy would keep its ratio to the US roughly the same. This is just a baseless assertion you’ve made repeatedly. You should provide some source and be a tad less aggressive about it if you want to be convincing.

solarmist 4y ago

It’s also useful for travelers getting a sense of prices.

aabhay 4y ago

What matters is the movement of prices over time. So if one stock was 20% higher in price than another yesterday, and today they're the same, then that's a big signal. We aren't interested in parity for the sake of parity itself.

jakub_g 4y ago

The difference is that "EUR/USD exchange rate" is a well-defined, known & real thing, tracked & used by millions of people and companies for doing business; whereas no one tracks "GOOG/MSFT exchange rate".