Forex is the largest and most liquid market, with trillions of dollars traded between millions of parties around the globe every day. One of the first steps in understanding the market — also known as foreign exchange or currency trading — is to get acquainted with some of the most commonly traded currencies. Here’s a look at six major currencies, as well as the basic features and characteristics of each currency.
1. The Dollar of the United States
The U.S. dollar, also referred to as the greenback, is first and foremost in the field of forex trading, since it is undoubtedly the most exchanged currency on the planet. The U.S. dollar can be found in a currency combined with all other major currencies and sometimes serves as an intermediary in triangular currency transactions. This is because Greenback acts as an informal global reserve currency held by almost every central bank and institutional investment entity in the world.
Moreover, due to the global acceptance of the US dollar, some countries use it as an official currency, rather than a local currency, a practice known as dollarization. The US dollar may also be widely accepted in other nations, acting as an informal alternative form of payment, while those nations retain their official local currency.
- Forex trading is the biggest and most competitive market in the world.1
- The US dollar, the euro, the Japanese yen, the Swiss franc, the Canadian dollar and the British pound are widely traded currencies.
- The US dollar is one side of several common currency pairs and is also a reserve currency, making it the world ‘s leading currency trading partner.
- Economic patterns in the United Kingdom. Movements in the British pound are sometimes recorded, while the euro is the currency of the eurozone.
- The Japanese yen is the most active currency in Asia, partially because of the popularity of carry trade.
The US dollar is also a significant factor in the foreign exchange market for other currencies, where it can serve as a benchmark or target rate for countries that want to set or peg their currencies to the value of the dollar. China, for example, has long had its currency, the yuan or the renminbi, fixed to the dollar. Much to the dissension of many economists and central bankers. More often than not, countries will lock their currencies to the US dollar to stabilize their exchange rates, rather than allowing open (forex) markets to determine the relative value of the currency.
Another advantage of the US dollar is that it is used as the primary currency for most goods, such as crude oil and precious metals. Thus, these goods are subject not only to fluctuations in value due to the basic economic concepts of supply and demand, but also to the relative value of the US dollar, with inflation-sensitive prices and US interest rates likely to influence the value of the currency.
2. The Euro is
The euro is the second most exchanged currency behind the US dollar.2 The official currency of most countries within the euro region, the euro, was launched on the international markets on 1 January 1999, with notes and coins coming into circulation three years later.
Besides being the official currency of most eurozone countries, many nations within Europe and Africa are pegging their currencies to the euro, for almost the same reason that currencies are pegged to the US dollar — to stabilize the exchange rate. As a result, the euro is now the second largest reserve currency in the world.8
As the euro is a commonly used and trusted currency, it is prevalent in the forex market and adds value to any currency pair in which it trades. The euro is widely traded by speculators as a bet on the general health of the euro area and its member nations. Political developments in the euro area may also lead to high trade volumes in the euro, especially in relation to countries that saw their local interest rates drop significantly at the time of the euro’s introduction, notably Italy, Greece, Spain and Portugal.9 10 The euro could be the most ‘politicised’ currency widely traded on the forex market.
3. The Yen of Japan
The Japanese yen is probably the most exchanged Asian currency and is seen by many as a proxy for the underlying strength of Japan’s manufacturing and export-driven economy. As Japan’s economy goes, so does the yen (in certain respects). Forex traders also track the yen to gage the overall health of the Pan-Pacific region, taking into account economies such as South Korea, Singapore and Thailand, as these currencies are much less traded on the global forex markets.
In forex circles, the yen is also well known for its role in carrying exchange. (seeking to benefit from the gap in interest rates between two currencies). The strategy involves borrowing the yen at almost no expense (due to low-interest rates) and using borrowed capital to invest in other higher-yielding currencies around the world, pocketing the rate differentials in the process.
With carrying exchange being such a large part of the role of the yen on the international stage, the continuous borrowing of the Japanese currency has made appreciation a difficult task. Although the yen still trades with the same fundamentals as any other currency, its relationship to international interest rates, especially to more heavily traded currencies such as the US dollar and the euro, is a major determinant of the value of the yen.
4/ The Big Pound of Britain
The Great British Pound, also known as the Pound Sterling, is the fourth most exchanged currency on the foreign exchange market. While the U.K. as an official member of the European Union, the country has never accepted the euro as its official currency for a number of reasons. Including historic pride in the pound and retaining control of domestic interest rates. As a result, the pound is often seen as a mere play in the United Kingdom.
Forex traders will also predict the value of the British pound on the basis of the overall strength of the British economy and the political stability of its government. Owing to its high valuation compared to its peers, the pound is also an important currency benchmark for many nations and is a very liquid part of the forex market. The British pound also serves as a major reserve currency due to its relatively high relative value compared to other global currencies.
5. The Dollar of Canada
Also known as the loonie, the Canadian dollar is currently the world’s largest commodity currency. Meaning that it always falls in line with commodity markets — notably crude oil, precious metals, and minerals. Since Canada is such a large exporter of such commodities, the loonie often reacts to fluctuations in underlying commodity prices, especially crude oil. Traders also trade the Canadian dollar to bet on commodity fluctuations or to hedge commodity market positions.
6. The Franc of Switzerland
Last but not least, the Swiss franc, which, like Switzerland, is seen by many as a “neutral” currency. More specifically, the Swiss franc is considered a safe haven within the forex market. Primarily due to the fact that the franc appears to move differently from more competitive commodity currencies, such as the Canadian and Australian dollars. In fact, the Swiss National Bank has been known to be very active in the forex market. In order to ensure that the franc transactions are relatively narrow in reach.
The Bottom Line
Each currency has unique features that influence its intrinsic value and price changes compared to other foreign currencies in the forex market. Understanding the forces that drive a currency is a crucial step towards being a professional investor in the forex market. The U.S. dollar, the euro, the yen, the British pound, the loonie, and the Swiss franc are big currencies to watch for.