The Most Traded Currencies - 2018 - the most traded currencies

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The most traded currencies -The foreign exchange market is effortlessly the largest and the most liquid market in the world. Millions of people (parties) trade trillions of dollars every single day with an average of $5.1 trillion traded per day. A vast majority of the trading occurs in huge financial hubs in the United States, the United Kingdom, Japan, Singapore, Switzerland, and Hong Kong.

For new and current forex market participants one of the first and most important steps is to be very familiar with the most traded currencies worldwide. In this articles, we are going to go through the most traded currencies and the qualities that make them accessible. This will boost your forex knowledge and help you takes more informed steps toward becoming a successful trader.

A list of the most traded currencies and why

the most traded currencies

The US dollar as the most traded currency. 

On the top of the list is effortlessly the most traded currency on the entire planet, the US dollar. The main reason the US dollar overrules all currencies is the stability of the US government and economic vitality.

The dollarisation

Dollarisation is when the residents of a particular country overuse the U.S. dollar or another currency with or instead of their local currency. Some cases involve unofficial dollarisation when certain individuals withhold foreign currency bank deposits or bond notes ( paper money) for protection against increased inflation in local currency. On the other hand, official dollarisation takes place when a government decides to legally adopt a foreign currency as the primary currency so to speak.

Reserve currency

A reserve currency is a currency that is detained by the government and some institutions in large quantities as a portion of their foreign exchange funds. It is usually used for investments or international transactions. Today the US dollar is the most important reserve currency in the world. In the past couple of years, the US dollar occupied more 60% of the total international reserves amount. This is the main reason that makes it the global currency.

A benchmark currency

Starting from the end of world war II to around 1971, almost all currencies, were pegged to the US dollar to some extent. At the same time, the USD pegged to gold. In today’s world, the US dollar represents a benchmark currency for particular countries that decide to fix their money on to the US dollar value. With the intention of trying to stabilize their exchange rate, China has had their currency ( the yuan) pegged to the US dollar for a long time.

For most commodities, it is a benchmark pricing mechanism

Another vital characteristic of the US dollar is that most commodities like precious metals and crude oil are denominated in US dollar. This suggests that these commodities are vulnerable to value fluctuation according to the supply and demand law. It also means that they are subject to the practical value of the USD and the interest rates and inflation which affect the dollar directly.

The EUR

the most traded currencies

Even though the euro was the last to land substituting the German Mark, the French franc and the Italian Lira, it has steadily crawled up to the second most traded currency in the world. Not only that but it is also the second reserve currency following the dominant US dollar. The euro is physical evidence of the European amalgamation so to speak, with 19 countries out of 28 EU countries using the currency.

The euro is a broadly used and trusted currency worldwide, and also quite dominant in the forex market adding to the liquidity of any currency which it trades within. Speculators often trade the euro on the basis of the Eurozone health in general, its member countries. And also the most vital economic and political events that take place within its borders. Political events that take place within the Eurozone usually result in the euro trading volumes rising.

Benchmark currency

Apart from being an official currency for the majority of the nations in the Eurozone, a lot of African and European countries have their currencies fixed onto the euro to stabilize their exchange rate. This is very similar to the US dollar case mentioned above. There are 22 countries as well as territories all in all outside of the Eurozone that have pegged their currencies on to the euro.

The principal reason that economically vulnerable countries decide to peg their currency on a more steady currency is mainly for security reasons. The euro is a very stable currency, and any country that has their local currency fixed on it might dodge bolting inflation and also lure into the state some foreign direct investment.

The Yen – JPY

the most traded currencies

In all of Asia, the Japanese Yen is without a doubt the most traded currency.it is also the main gauge of the fundamental strength of the manufacturing and export economy of Japan.

Many measure the Pacific region’s overall health using the Japanese Yen. This includes economies like Singapore, South Korea and Thailand whose currencies are traded a lot less in the international foreign exchange markets.

Carry trade currency

This is a strategy whereby investors borrow funds at meagre interest rates and then invest it in assets that will probably give higher returns. Carry trade is most dominant in foreign exchange markets. The carry trade strategy is relatively dependent on the stability of asset prices. This is because any opposing movement of the exchange rate can quickly eliminate the critical interest rate variance.

In forex the yen is also very well know for the prominent part it plays in the carry trade. Due to stagnation, the Bank of Japan has had an interest rate that remains at 0%. Furthermore in the last two decades sometimes even negative. Hence Traders have decided to borrow the Yen at reduced interest rates which they will then exchange for a different currency which pays higher interest rates. Therefore traders benefit because they pay low-interest rates on the money that they borrow. However, they receive high-interest rates on the money they trade.

The carry trade is an essential element for the international existence of the yen. Therefore it has become difficult for the Japanese currency to rise due to the continuous borrowing of the Yen. Even though it trades like any other currency with the same basics. The association of the yen with international interest rates, to the EUR or  USD, especially makes carry trade a substantial determining factor of its ultimate value.

The Japanese Yen as a safe haven.

At times when most traders are vulnerable to risk or incline to it, such as inflation situations,
moments of economic uncertainty and other crisis. History has proven the Japanese Yen has stood as a haven currency because of its stability during these times as compared to other currencies.

The British Pound – GBP

the most traded currencies

The pound popularly known as the pound sterling falls at number four on the on traded currencies list. For a couple of decades, the pound was the second most traded currency. However, due to the British Empire’s deterioration and the speedy rise of the euro the pound lost some of its strength

The relative value of the pound in comparison to other global currencies makes it eligible to act as a colossal reserve currency. Despite the exit planned for March 2019, the UK is still an authorized member of the EU until then. However, it decided to not have the euro as its official currency for several reasons. Historical reasons include pride in the Pound Sterling as well as retaining the domestic interest rates. According to forex traders, the value of the British pound depends on the stability of the economy and politics of its government. Compared to other currencies has relatively high value and this makes it a vital currency benchmark for a lot of nations as well as being very liquid in the forex market.

Forex traders will often base the pound value on the strength of the British economy and the government’s political stability. Due to its increased value, the pound is a vital benchmark currency for many nations. It also acts as a very liquid component in the forex market. Nevertheless, the pound remains an occupant of an important position worldwide as London is Europe’s financial capital. Out of a few currencies, the pound is one of those that slightly overtakes the USD value.

The AUD

the most traded currencies

Despite the recent creation (1966) of the AUD to replace the Australian pound. It escalated very quickly to become one of the most traded currencies. It is also very popular in the Asia-Pacific region because of the stable Australian economy.

Carry trade favourite

The interest rate of the Royal Bank of Australia is higher than others most of the time. This makes it very popular to currency carry traders.

Depends heavily on commodities

The Australian dollar ties with commodities such as gold and silver. Therefore the health of the AUD is diligently connected to these two commodities. This also results in Australia’s interest rates and inflation control being highly dependant on the development of commodities.

The AUD also has a historical relationship with Gold’s spot price. This close relationship presents an incredible opportunity to create a pair trading strategy.

The Canadian dollar

the most traded currencies

The Canadian dollar is also popularly known as the loonie and the leading commodity currency worldwide.

This means that it moves alongside the commodities market namely minerals, crude oil, and precious stones. As Canada is a massive exporter of commodities of this sort. The volatility of the loonie is very high regarding the movement in prices notably of crude oil.

Canada is located very close to the United States, the largest consumer base worldwide.

Therefore the Canadian economy and the dollar are remarkably linked to the US dollar movement. This includes the strength of the US economy.

The Swiss Franc

the most traded currencies

It is one of the only currencies that was not pegged to the USD after World War II. This has named it a “neutral currency.”

A haven currency

When the economy expands, and other currencies or assets increase in value. The Swiss franc moves in the opposite direction which makes it a haven currency.

Carry trade

Due to the economic stability, high liquidity and low rates policy. The Swiss franc also qualifies as a carry trade currency.

Its value is not dependant on economic conditions

The value of the Swiss franc is not determined by the economic conditions of Switzerland. Instead, the primary dictator of the Franc is the interest rates policy of the Swiss National Bank. This is because the Franc demand is deduced from it being a trustworthy, liquid and stable currency

Conclusion

It is evident that each currency has its particular features that stand as determinants of its overall value.

Including the effect, they have on the movement of prices to other currencies within the forex market. Understanding the primary factors that move a currency is a significant step toward becoming a successful forex market participant.

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