Posted On November 4, 2020, 9:49 am by Christina Clarke
Forex is one of the biggest markets with a high liquidity factor. So many currencies are traded between millions of people around the planet every day. If you want to understand the nuances of foreign exchange markets or currency trading, the first step would be to gain some friendliness with most popular commonly traded currencies. Here, we will list down most traded currencies with characteristics and traits of each.
The U.S. Dollar
The first and the foremost currency in Forex trading is none other than the U.S. dollar. It is also called greenback, and it is one of the most accessible currencies to trade. The U.S. dollar is found as a currency pair with most of the popular currencies and often acts as a linkman between triangular currency transactions. The reason behind this is that the U.S. dollar is held by nearly every central bank and investment institution in the world. It is, therefore, the unofficial global reserve currency.
Many countries practise “dollarisation”, a practice where the U.S. dollar is the official currency in line with the local currency.
The U.S. dollar acts as a benchmark in forex markets for other currencies in a sense that many countries choose to fix their currencies to the dollar’s value. Countries mostly fix their currencies to the dollar’s value to stabilize their exchange rates rather than allowing the market to rule the currency’s relative value.
One other distinctive feature that puts the U.S. dollar on the top pedestal is that it is used as a standard currency for most commodities like metal and crude oil.
The euro comes second after the dollar. The euro came into play officially on January 1, 1999, the notes and coin circulating after three years. It is used as the official currency by many nations within the eurozone.
Many countries in Africa and Europe fix their currencies to the value of the euro for the same reason, to secure the exchange rate. Due to this, the euro is the second largest reserve currency.
Euro is a trustworthy currency and it is widely used in the forex market to build the liquidity of the market. Investors and speculators trade the euro in the way of the overall condition of the eurozone. Political outlook in the zone can facilitate more extensive trade of the euro. This is more concerned with countries that experienced a steep fall in their domestic rates of interest during the inception of the euro, namely, Italy, Portugal, Spain, and Greece. The euro, for above-mentioned reasons, may be called the most “politically inclined” currency in the market.
The Japanese Yen
The yen is one of the most heavily traded Asian currencies in the world for the apparent reasons for Japan being so economically and infrastructurally strong. In some respects, when Japan’s economy appreciates, the value of the yen appreciates as well. Forex traders look out for yen to measure the overall well-being of the Pan-Pacific zone, taking economies like Thailand, South Korea, and Singapore in consideration, whose currencies are traded far less in the forex market.
The yen is also famous in the market for what is known as the “carry trade”, profiting from the difference between interest rates of two currencies. The idea is to borrow yen at minimal cost (due to low-interest rates), and use borrowed money to invest in high-retaining currencies and profiting from differential interest rates.
With carry trade becoming a common practice around yen in the forex market, the continuous borrowing has made positive valuation troublesome. The trading of the yen is based on the same principles as other currencies, its connection to rates of interest internationally, mostly for primarily currencies like euro and dollar, and is an essential determining factor of its value.
The British Pound
The British Pound is also often called the pound sterling. The pound makes its place in the top four currencies in the foreign exchange market. Although the U.K. was part of the union of Europe, the British country did not take the Euro as its core currency for two main reasons. First, they never wanted to lose the pride that comes with the history of the pound, and second, to regulate and control internal rates of interest. Due to these reasons, the pound is sometimes contemplated as an original play on the U.K.
The worth of the pound is estimated on the basis of economic strength and stability of politics in the country.
because of its value, it is also seen as a benchmark for other currencies in the market by forex traders. It speaks for a very high liquid value in the foreign exchange market. It also acts as a reserve currency due to its historically high relative value as compared to other currencies.
The Canadian Dollar
The Canadian dollar is the major currency in commodity trading in a sense that it always moves along the lane of commodities like precious metals, crude oil, minerals in the market. The other name for the Canadian dollar is loonie. Canada is a major exporter of commodities mentioned above, and therefore the loonie often acts as a reflex to underlying commodity prices, especially prices of crude oil. investors and traders mostly use Canadian dollar for hedging and to speculate on movements and positions of commodities.
Canada, being close to the U.S., the economy of Canada and the dollar are highly linked and affected by the economy of the U.S, and its dollar.
The Swiss Franc
Much like Switzerland, the franc is seen as “neutral” currency in the market. To be more precise, the Swiss franc is seen as a refuge within the foreign exchange market. The main reason being the franc moves a different way than most of the highly volatile currencies in commodity markets like Australian and Candian dollars. The National Bank of Switzerland has been participating in the foreign exchange market to make sure that currency trades within a stern range, with less volatility and regulated interest rates.
The Australian dollar comes in the top 10 for the reason that Australia is one of the largest exporters of major commodities like coal, iron, copper, and more. This currency is the sixth most commonly held currency as a reserve.
The Chinese Renminbi is sometimes referred to as yuan. It is the official currency of the People’s Republic of China and the seventh most held reserve currency.
For many years, the value of yuan was fixed against the U.S. dollar. But now, the People’s Bank of China (PBoC) has loosened the strings of its policies to allow the currency to float on a tapered band against a flock of major currencies, and eventually, letting it flow freely in future.
Most analysts and economists believe that China has benefited hugely from the low Renminbi in a sense that it has made China’s exports more competitive in the market, and has enabled it to have a surplus in trade with other countries.
Since China is a significant manufacturer of commodities and goods, the value of Renminbi depends highly on the country’s trade relations with other major countries like the U.S. and Europe.
Hong Kong Dollar
This currency is issued by the Hong Kong Monetary Authority (HKMA). Unlike other currencies mentioned above, the Hong Kong dollar is not a major reserve currency. But in the current times, this currency has come up from number thirteenth to number nine. This is due to an increase in the trading volume.
New Zealand Dollar
The New Zealand dollar is the last currency on the list and is the official currency of New Zealand. It is not a major reserve currency as well. Just like the Hong Kong dollar, the value of New Zealand is dependent on the trading relations, the value of imports and exports. New Zealand’s core
trading companions are China and Australia.
New Zealand’s major exports include agricultural products like meat and dairy. The major products imported by New Zealand oil, cars, and machinery.
Each currency has its traits and features that affect its underlying value and prices in the Forex market. Understanding the factors and reasons that cause these changes and movements in the currency is one of the first steps to becoming an intelligent forex trader.
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