Have you ever wondered what the most popular currencies in the world are? Well, it wouldn’t take too many guesses to recognize that the US dollar is likely one of the top candidates. The euro also stands as a likely candidate given the sheer size of the European Union (EU).
The most popular currency pairings in forex.
A trade involves two sides and this is true for forex trading too. In this case, two currencies are involved. Some pairings are more liquid and easily tradable than others. With that, the most popular currency pairs are discussed as follows.
The EUR/USD is comprised of the euro and US dollar. It is considered the most popular currency pairing based on the volume of trading activity. As we alluded to earlier, this pairing represents the two largest economic forces in the world. The US dollar is in fact the most popular currency with the euro in second place. Some factors that affect this pairing mainly revolve around the relative strength of each entity’s economy. Interest rates can be a good indicator as there is a positive correlation with a nation’s interest rate and its relative currency value. An additional factor that is unique to the EU is the political stability of its member groups. When instability arises, the euro tends to suffer.
The USD/JPY pairing is comprised of the US dollar and the Japanese yen. Japan has the largest economy in all of Asia, as well as the second largest on a global scale. The high levels of trade activity between these two countries has created a constant need for liquidity. One should consider the Japanese economy when determining the relative strength of this pairing. Specifically, Japan is a country that relies heavily on imports and exports and rising commodity prices like crude oil can place downward pressure on the yen.
The GBP/USD pairing is made up of the British sterling pound and the US dollar. You can sometimes hear it being called “the cable,” referring to a time when New York and London traders communicated bid and ask spreads via an underwater cable. This currency pair is especially liquid and widely available to many investors. Again, the relative strength of the two depends on each nation’s economy. You should also consider comparing domestic interest rates as they tend to reflect the relative strength of each currency.
This currency pairing is comprised of the US dollar and the Swiss franc. The franc is a unique currency in international markets. Switzerland has been known for its history of political neutrality and discreet banking practices. As such, forex traders tend to view the franc as a safe and stable currency. Especially in times of international commotion, traders flock to the franc for protection against other volatile currencies. This means that in times of uncertainty and noticeable volatility, the franc tends to get bid up, while other currencies drop. In cases where volatility is absent, the franc is given less attention. However, this pairing is quite unique since the US dollar is also considered a safe currency in times of global uncertainty. Comparing the relative strength of each can be a difficult process.
So you may have noticed at this point that the US dollar has appeared in the top four major currency pairings. This makes sense given its unique role as the world’s reserve currency. Since the US dollar is used to settle a majority of international transactions, there is clearly a need for liquidity. And this goes beyond the top four major pairings. Ultimately, as a forex trader you need to be aware of the liquidity of various currency pairings. The best place to get started is with the four mentioned above.
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