Forex traders profit from the largest and most liquid market worldwide. Its daily turnover reaches six trillion US dollars, and access is easy to gain. However, you need to choose your instruments carefully. Not all of them are equally reliable.
Some pairs in the international currency exchange are more volatile and risky (but also potentially profitable) than others. Discover six most-traded currencies that are preferred by experts. If you learn their dynamics, you can reap substantial benefits trading on the foreign exchange online.
1. The U.S. Dollar: Top Currency in the World
Could any other currency top the list? Of course, no! Nothing beats the greenback. The American dollar is the most important reserve currency and the most popular system in general. It is held by every central bank and institutional investor on the planet.
The USD is found in most Forex pairs because it adds liquidity to any combination. This means that the vast majority of traders need to keep track of the US economy to predict where their instruments will move. Some nations even undergo dollarization to use the US dollar as their official currency.
Dollars are widely accepted around the world. Countries may also use American money as an informal alternative form of payment. Nothing beats the USD.
In the 1940s, most currencies became pegged to the US dollar. This currency exchange international system collapsed in the early 1970s, which allowed floating rates. Still, the American dollar acts as a benchmark for many countries, so it is crucial for their foreign exchange rates. For instance, the yuan has been tied to it for quite a while.
Pegging to the dollar makes other currencies more stable. They are better protected from market forces and the myriad economic and political drivers that could affect their value.
Finally, the top currency in the world is used for the valuation of most commodities like gold or crude oil. They lose or gain value not only due to basic forces of supply and demand. Commodities are also affected by the US interest rates, inflation in the country, and the general state of the American economy. Trading pairs with the participation of the Dollar are the most popular on the Olymp Trade platform.
2. The Euro
The runner up serves as the official currency of the group of EU member nations. It has been in the market since 1999. Banknotes and coins entered circulation in 2002.
Some countries in Europe and Africa also tie their own currencies to the euro, so it functions as an important benchmark. Pegging stabilizes the exchange rate. As a reserve currency, the euro comes second after the American dollar. It is part of major and minor currency pairs.
The euro is perceived as trustworthy, which explains its popularity and ensures liquidity for related pairs. Today, the currency of the European Union may be regarded as one of the most politicized currencies worldwide.
Local political events may cause trading volumes to surge. This was particularly true for countries whose interest rates collapsed when the euro was introduced. These were Greece, Portugal, Italy, and Spain.
3. The Japanese Yen
Of all Asian currencies, the Japanese yen is the most traded one, and it is also a top 10 currency in the world. In general, wherever the Japanese economy goes, so goes the currency. Its value also reflects the economic health of the entire Pan-Pacific region. Many of its currencies are traded as exotics, and they are quite obscure in comparison with majors and minors.
The Japanese currency is commonly used for carry trading. This involves borrowing currency with a lower interest rate to invest in another one whose interest rate is higher. As the interest for a year is very low, you can borrow it at almost no cost and use it for investment in some high-yielding currencies.
Appreciation of the yen is complicated as it is being constantly borrowed. Naturally, the currency is also affected by fundamentals in the Forex market. It is dependent on international interest rates, and majors like the US dollar and the euro. At the moment, there are 7 Forex trading currency pairs available on the Olymp Trade platform with this currency.
4. The Great British Pound
While the United Kingdom was officially a part of the European Union until Brexit, it has always stuck by the Great British pound. The euro was never introduced, partly due to national pride.
Consequently, the currency of the UK is viewed as purely linked to its economy. It is assessed based on the robustness and stability of the local financial and political systems.
The pound is fairly expensive in comparison with peers and serves as an important benchmark for the valuation of other currencies. It is also known for high liquidity. The British currency is an important global reserve currency thanks to its high value. It is the second-largest currency in terms of trading volumes worldwide.
5. The Canadian Dollar
The Canadian dollar is the first commodity currency in the world, so its dynamics are tied to the markets for crude oil, minerals, and precious metals. The country is an important exporter of these commodities, so the currency is highly susceptible to movements in the corresponding markets, particularly the oil market.
Nicknamed ‘the loonie,’ the Canadian dollar is often traded for speculation purposes. Those who want to profit from trends in the commodity market, or to hedge their positions in it, can monetize their knowledge of the Canadian dollar.
As the country is adjacent to the USA, this also plays a role. After all, the neighbor has the largest consumer base worldwide. Naturally, the loonie is correlated with the US dollar.
6. The Swiss Franc
Last but not least, traders may focus on the Swiss franc. Like the issuing country, it is viewed as largely neutral and a safe haven amid the chaos of the currency exchange. The Swiss currency usually moves differently from its more volatile peers.
The central regulating entity makes sure the currency moves within a tight range, and volatility and interest rates are under control. The Swiss National Bank has been active in the Forex market for quite a while.
For example, until 2005, it maintained a fixed EUR/CHF rate, as the currency had become very expensive. Eventually, when the system was abolished, the rate collapsed in favor of free-floating. Many traders who did not have a stop loss in place ended up in that red.
Which Currencies Should I Trade?
No single currency pair is guaranteed to bring you substantial returns. A lot of factors come into play, including liquidity, volatility, and your own skills and foresight. Remember that majors are always the most liquid, so you will have no difficulty finding a counterparty for your trade. Still, their prices may move inside ranges that do not allow a dramatic profit.
In comparison, exotic currencies are often particularly volatile, with large swings throughout the day. Still, volatility equals unpredictability. You may be better off trading large volumes of more stable currencies, as long as you keep risks under control.
Whichever pair you trade, you need to learn how its elements move. For example, somebody using the USD/ZAR combination should monitor the health of the South African economy, as well as the world’s leading superpower. In theory, even exotics may be profitable if you have a profound understanding of their movements.
Have a solid strategy in place and look for a confluence of factors before making any decisions. Majors can bring you profit or loss if nothing is guaranteed. Still, as these economies are the most widely covered by the media, they are the easiest for fundamental traders.
Did you know that the highest currency rate in the world does not make it into the Top 6? The Kuwaiti Dinar used in the State of Kuwait is valued at roughly $3.31 USD.
The Most Traded Currencies Today
No other financial market can beat Forex in terms of volume and liquidity. Traders may use major, minor, or exotic currency pairs to achieve profit. Most combinations include one or two of the above-mentioned currencies. Watch them closely in order to predict market shifts.
Each of the six majors has peculiarities affecting its value and movements relative to other currencies. Without fail, the US dollar is the world’s top currency and the most important one to watch. First, it is included in most currency pairs. Secondly, it is a global reserve currency. A large share of international trade is conducted in American dollars.
The euro, on the other hand, is affected by changes in the Eurozone, and the British pound is susceptible to economic trends in the United Kingdom. The Japanese yen is the most traded Asian currency worldwide, which is partly explained by the popularity of carry trading.
To succeed in the Forex market, you need to develop a profound understanding of the drivers behind currency trends. This is the key to becoming a savvy trader and making profits regular. Learn about the American and Canadian dollar, the British pound, the yen, and the euro, and the Swiss franc. Keeping a close eye on these currencies will help you achieve more in trading on Olymp Trade platform.