The largest market for trading currencies is the forex market. Millions of dollars are traded every day. Beginning traders need to know five steps when trading the most common currency conversions and what their uses are. The next step is for the traders to know the characteristics of the six most popular currencies.
1. The Dollar of the United States
The U.S. dollar is the currency that is traded the most. The dollar is found in pairs with every other top currency and its currency conversions are used in the middle of triangular transactions. The dollar is the global reserve currency unofficially, which is held in central banks and entities that invest all over the world.
Since the dollar is accepted worldwide, some countries have adopted it as their own currency, which is a practice called dollarization. The dollar is accepted in almost every nation as a different method of payment, even though those nations have their own currency.
This currency is important in exchange rate markets, which acts as a benchmark for other countries to compare their currencies value to. Many countries currency conversions or exchange rates to the dollar to stabilize the local exchange rate, instead of allowing the free market to change its value.
Another way the dollar is important to know is the dollar is the standard currency in commodities. The commodities are subject to the fluctuations of the market as well as the value of the dollar. Prices are sensitive in inflation and interest rates, which are also tied to the currency’s value.
2. Euro Currency
The second most traded currency is the euro which was introduced on January 1, 1999. This currency is also one of the largest reserve currencies and is one of the base currency conversions.
The euro is the currency for many euro zone nations, and several others within Europe, and Africa peg their own currencies against the euro.
The euro gives the market liquidity to currency pairs that it trades in. Many spectators trade the euro when playing on the health of their nations. Politics in the euro zone leads to increased trading volumes, especially when interest rates plunder.
3. The Yen of Japan
Asia’s currency is the Yen, and is a proxy for the strength of the economy for manufacturing and export. The yen depends on how the economy is doing and shows the health of the entire Asia nation.
The yen is also is used in carry trades in currency circles. Traders can trade the yen with very little cost and invest it in high-yielding currencies. The yen’s value usually depends on greenback and euro currencies. It is often used as a one of the main currency conversions in forex speculations
4. British Pound Currency
Another name for the pound is the pound sterling, and is in fourth place when ranking in the forex market. Even though the United Kingdom is a part of the Union, they use their own currency due to having pride in their local currency. The GBP is a pure play for the UK. Traders base their currency conversions on the strength of the economy and stability in their government.
5. The Franc
Switzerland’s currency is known as the Swiss franc, and is considered neutral in the market. This currency is safer in the market since it moves in the opposite direction of volatile commodities. Their National Bank is active in the market to make sure that their currency conversions rates are in a tight range to minimize volatility and for interest rates to be stable.
6. The Loonie
The last currency is the Canadian dollar, which is also called a loonie. This currency is known as a commodity currency that trends with similar markets. Any of the loonie currency conversions is often traded to figure out the movements of the commodities. The Canadian dollar is also a hedge to the holdings of commodity contracts.
The loonie is in line with the United States economy’s strength and the movements of their dollar.
Each currency has different features that affect the value and movements when compared to other country’s currency conversions in the market. A trader must understand each currency before they start trading in the market.