Currencies that are frequently traded and commonly seen in the forex market are called “major currencies”, based on the volume of global transactions. According to the Bank for International Settlements (BIS)2019 statistics, the most commonly traded currencies, from the highest volume to the lowest, are:
- US dollar
- Japanese Yen
- British Pound
- Australian Dollar
- Canadian Dollar
- Swiss Franc
- Chinese Yuan.
One former traditional major pairing, the New Zealand Dollar, has been replaced by the Chinese Yuan and even the Hong Kong Dollar in recent years, now ranked 10th. Leading pairs account for the vast majority of trading in the global forex market.
Minor and Exotic Currencies
Other currencies, also known collectively as minor and exotic currencies, can also be popular under certain economic circumstances and market themes.
For example, “BRICS” :
- Brazilian Real
- Russian Ruble
- Indian Rupee
- South African Rand
These have also drawn market attention during different periods.
After the Second World War, the gold standard used by all countries collapsed and the “Bretton Woods system” established the dollar standard. At that time, the United States was the biggest economic power, and all currencies were pegged to their USD dollar at a fixed exchange rate, which gave the turbulent post-war international financial market a shot in the arm.
Since then, most international trade settlements have been based on the USD. The USD is the largest global reserve currency. Therefore, currency paired with the USD is called major currency pairs, such as:
- EUR / USD
- USD / JPY
Both can reflect this core economic model following the dollar standard.
Basically, pairs that do not involve the dollar are called cross pairs. As the settlement currency has been dominated by the US dollar to a very large extent, it may not be possible for countries to make a direct currency exchange from one to another.
Their process is: to exchange A into USD first and exchange into currency B using USD. Therefore, the cross-exchange rate can be converted mathematically by simply using the exchange rate of each currency with the dollar.
In the forex trading market, the related cross pairs of euro, yen and sterling are the most active. From an investor’s point of view, the function of cross pairs is “a way that no longer facilitates the need to maintain two open positions”.
Assume that AUD/USD is 0.7 and USD/JPY is 110, so the exchange rate of AUD/JPY is 0.7*110=77.
If there are investors who are bearish on the yen and bullish on the Australian dollar they can simply long the AUD/JPY, rather than going long on both AUD/USD and USD/JPY.
Related Article: What are Long and Short Positions?
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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted by this article. Please be firm in your thinking and do the corresponding risk control.