The reason it was such a strategic position, is because the town was a natural fortress. It's located on top of a high, flat rock, which is riddled with tunnels for gun casemates, making the town of Luxembourg very hard to take.
It was a vital part of the Spanish Road that the Spanish Habsburgs needed to move troops from their lands in Italy to the north during the 80 Years War.
In 1867 by treaty the anything military and the fortress was required to be torn down. Kind of a shame, because just a few decades later fortresses became almost useless in war. It's a bit weird to see the ruins of a fortress and then go to the local museum and realize that it was torn down recently enough that there are tons of photographs of it. On the other hand it allowed the rest of the city centre to be built up.
It was a vital part of the Spanish Road that the Spanish Habsburgs needed to move troops from their lands in Italy to the north during the 80 Years War.