The forex market is the biggest financial market in the world today. Trillions of dollars’ worth currencies are traded every day between parties. If you are a newbie to the currency trading market, it is important for you to know about the most popular currencies that are traded in these markets. It is equally crucial to know their uses outside of this market as well. Given below are some basic characteristics of some of the most popular currencies traded in the markets.
United States of America Dollar (USD)
The USD is known to be the most traded currency in the world. The dollar is traded as one of the pairs with all other major currencies that are traded. It often acts as a middleman in any triangular currency trades. This is always so because the USD is the reserve currency of the world that is held by every major and central bank of a country and premier financial institutions of most nations.
Another factor that increases its popularity is that it is the most accepted currency worldwide. Certain other countries also use the USD as their official currency. In many other countries, the dollar is accepted as a form of payment though they have their own separate official currency.
In the forex market, it often happens that many other currencies often use the USD as a benchmark. These countries opt to peg their currency value to that of the USD. As an example, in the year 2011, China’s currency the renminbi was pegged to the value of the dollar though it was opposed by a majority of economists and bankers. Many a time it is common to find countries peg their currency value to the USD in order to stabilize their rate of exchange. Otherwise, the forex market will keep altering the currency’s relative value.
It is important for newbie forex traders to understand that a majority of the standard commodities such as gold and other precious metals and crude oil use USD as the currency for exchange. Therefore their prices of these commodities depend not only on the demand-supply fluctuations but also on the current value of the USD. It is important in this context to understand that the USD value is also directly dependent on the inflation rate and UD interest rates.
European Euro (EUR)
Although a late entrant to the world’s currency market, the euro has attained the status of the second most traded currency in the world. It also holds the second place as the world’s largest reserve currency. It is the official currency of many nations in the Eurozone. It is interesting to note that the euro officially entered the world markets only on January 1, 1999. The coins and notes followed suit and were in full circulation about three years afterward.
Just as with the dollar, there are many countries both within Europe and also in Africa that peg the value of their currencies to the value of the euro. This is done for the same reason as in the case of the USD: in order to stabilize the exchange rate of their currency.
As a currency, the euro is widely used and very trusted. It, therefore, adds liquidity to the currency pair that it is traded with. Speculators trade the euro to test the health of the currency in the Eurozone and other nations. If major political events take place in the Eurozone, then large volumes of euro are traded in the markets. The trades happen in relation to those nations whose interest rates fell down when the euro was introduced: Portugal, Spain, and Greece. It is observed as one of the most politicized currencies that is actively traded in the currency market.
Japanese Yen (Yen)
The yen is one of the most traded currencies outside Asia. The value of the yen is seen as a reflection of the strength of Japan’s export and manufacturing economy. When the Japanese economy does well, the value of yen goes up. The yen is also used to measure the economies of countries in the Southeast Asian region such as Korea, Thailand and Singapore as well whose currencies are less traded.
The yen is widely used in carry trade transactions. Japan had been known for having a zero interest rate policy for many years now. This has resulted in many borrowing from Japan and investing in higher-yielding currencies and pocketing the difference thereof. Because of this, the value of the yen has not appreciated much. Though the trading fundamentals are the same for this currency, its relationship with international rates largely determines the value of this currency.
British Pounds (GBP)
The GBP or the pound sterling takes the fourth place in the most traded currency category of the currency markets. It is also considered a reserve currency owing to its value when compared to other currencies. It also maintains sufficient control of its domestic interest rates which is yet another reason for its value. GBP is yet another liquid currency in the forex market. It is a benchmark currency for many other countries as well.
Swiss Franc (CHF)
Financial experts refer to the Swiss Franc as the neutral currency. It is viewed as one of the safest currencies to trade in the forex market. The franc always moves in a direction opposite the more volatile currencies such as Australian and Canadian dollars. It is observed that the Swiss National Bank allows the franc to be traded within tight ranges and to keep volatility down.
The Canadian Dollar (CAD)
Otherwise called the loonie, the Canadian dollar is the foremost currency and moves in tandem with commodities such as crude, minerals and precious metals. Canada is a country known for export of commodities and this makes the loonie very volatile. The Canadian dollar is used by the traders to speculate on movements of commodities or to hedge their risks of contracts held by them. The Canadian dollar strongly depends on the strength of the US economy and movements of the USD.
Every currency has characteristics that are relative to other currencies in the market. It, therefore, pays to understand what moves the value of a currency as it will help individuals to trade successfully in the forex market.