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Forex trading allows traders to exchange various currencies from different parts of the world. The value of a country’s currency is closely tied to its economy. Therefore, countries with large economies and a high volume of international trade tend to have their currencies exchanged more often. These are usually developed economies like Japan, the United States, and the United Kingdom. As the country’s trades and exports expand, more institutions and financial bodies begin to buy and sell these currencies as their demand and supply fluctuate. In this article, you will learn about the 5 most traded currencies in the world and why they’re essential.
The US dollar
The United States has the largest economy globally, and the US dollar is the most traded currency. It comprises major forex pairs and accounts for a significant number of foreign exchange transactions expected on forex brokers like Oanda. The dollar is sometimes regarded as the global reserve currency because it is held by nearly every central bank and institutional investment entity in the world.
Some countries peg their currencies to the dollar, which counters the effects of exchange rate fluctuations and keeps them stable.
Most commodities and assets like oil and precious metals are traded against the US dollar. This makes them sensitive to fluctuations in the value of the dollar or exchange rate. The forex market is, therefore, highly influenced by news and economic data relating to the United States. The dollar is highly traded due to its widespread acceptance and increased global relevance.
The euro is the second most-traded currency in the world and the official currency of most countries in the eurozone. The European Union introduced it in 1999, and supporters of the euro argued that a single European currency would boost trade by eliminating foreign exchange fluctuations and reducing prices.
Like the United States dollar, some countries peg their currencies to the euro to keep them stable and protected against exchange rate fluctuations.
The euro is currently used by 19 EU countries, and consequently, any currency that it’s paired with forms a volatile and liquid currency pair. This is because the euro is highly traded and trusted by financial institutions, governments, and banks around the world.
The value of the euro is largely influenced by the political and economic developments in the eurozone. The prominent countries include Italy, Germany, Spain, and Portugal. Relevant news data include; GDP news, unemployment data, interest rate announcements, trade agreements, government policies, etc.
The British Pound
The British Pound is the official currency of the United Kingdom. Even while the UK was part of the European Union, it maintained the use of the Pound as its official currency. This ensured that monetary and economic policies were domestically controlled to tailor them to the needs of the UK. The strength of the British pound is influenced by the political stability of the UK and the overall economic strength. The British pound also acts as a large reserve currency due to its historically high relative value compared to other global currencies. Many countries now peg their currencies to the pound to keep them stable.
The British pound tends to be highly volatile during the London session because London is regarded as the ‘economic capital’ of the world. Forex traders, banks, financial institutions, and hedge funds exchange the pound during this session, and this volatility is evident in the magnitude of price swings seen in British pound crosses during the London session.
The Japanese Yen
The Japanese yen is the official currency of Japan and remains the most traded Asian currency. Japan’s economy is largely driven by exports and the bank of Japan constantly makes economic policies and regulations to keep the Japanese exports highly competitive globally. These include zero-interest loans and policies to encourage borrowing and investment.
The Japanese yen is usually the most traded currency in the Asian trading session and its value is tied to the economic performance of Japan. The yen is also regarded as a ‘safe haven’ currency that investors run to in times of uncertainty. However, its usefulness as a safe investment has been questioned in recent times as its value keeps falling.
The Australian Dollar
The Australian dollar is one of the most-traded currencies in the world. The AUD/USD currency pair is highly liquid and volatile, thanks to the large number of traders who exchange the currencies that comprise it.
The Australian dollar is a commodity currency because its value is largely tied to the commodities exported by Australia. These commodities include iron ore, precious metals, and agricultural products.
Ultimately, the value of a currency is influenced by a variety of factors. The most-traded currencies are those that are exchanged in large volumes due to their global or international demand and significance.