There are many currencies that are traded on the forex. However, the most traded currencies in the foreign exchange market are the Euro, the United States dollar, the Japanese Yen, the British Pound, the Swiss Franc, the Canadian dollar and the Australian dollar.
The strong international presence of the euro comes from the strength of the EMU’s (European Monetary Union) members.
Euro is the official currency of the Eurozone (also called Euro Area), consisting of the following European states (and expected to extend to include others): Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Spain, Cyprus (from January, 2008) and Malta (from January, 2008).
Monaco, San Marino, and Vatican City are not members of the Eurozone and EU but also use the euro. Other territories that have adopted the euro but don’t have formal euro agreements are Andorra, Montenegro, and Kosovo.
Combining the official members of the Eurozone with the countries with currencies pegged to the euro, it turns out that the euro directly affects close to 500 million people worldwide. As of December 2006, Euro surpassed the US dollar in terms of circulating value of cash.
USD (United States dollar)
The US dollar is referred to as the currency most used in international transactions. As a result the US dollar has been often used as the quote currency for the other currencies. It is also currently the major international reserve currency.
With the introduction of the euro as a cash currency, the dollar started to depreciate in value. The actions taken by the Federal Reserve on September, 2007, further contributed to the euro’s rising value and caused another record low of the dollar which fell below €0.70.
JPY (Japanese Yen)
Even tough the Japanese yen doesn’t enjoy the same popularity as the US dollar and the euro, it occupies the third place in terms of trade popularity in the world and the fourth place in terms of being used as a reserve currency (after the USD, the euro and the British pound).
The Japanese yen is characterized as highly liquid. The factors that play a major role in determining the value of the yen include:
- The Nikkei index
- The Japanese stock market
- The Japanese real estate market
GBP (British Pound)
Before the World War II the British pound represented the major currency of reference. Even though it is heavily traded against the euro and US dollar, its trade relations with other currencies are characterized with volatility.
The overall uncertainty that surrounded the period prior the introduction of the euro was beneficial to the value of the British pound. However, after the euro was introduced the higher interest rates of the UK and the lower ones of the Eurozone are tried to be brought closer together by the Bank of England.
The government officials have tried to pass a referendum about UK’s adoption of the euro, but no positive results have been shown yet. Adopting the euro remains a politically controversial subject.
CHF (Swiss Franc)
Since Switzerland is a member of neither the European Monetary Fund nor the G-7, it is the only major European country with these unique characteristics. Additionally, despite its small economy, the value of the Swiss franc is relatively high reflecting the strong financial and economic system of the country.
Switzerland has close connections with the Eurozone, which stem from its closeness with Germany in trading terms. In times of a political or economic uncertainty, the Swiss franc will be preferred as compared to the euro.
Even though the Swiss franc is regarded as a very stable currency, forex experts believe that it closely resembles the behavior of the euro, with the exception that it lacks its liquidity. If the supply of the Swiss franc is less than the demand, it is possible that the Swiss franc experiences higher volatility than the euro.