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March 11, 2015
The Forex Market is the largest and most liquid trading market on the planet. Trillions of dollars in a variety of currencies change hands every day. Knowing a bit about the Forex market is integral to any person or business handling overseas money transfers or any other type of business abroad. Timing your foreign money transfer just right can mean the difference between making and losing large amounts of cash, especially when talking about transfers of large sums.
Despite the hundreds of world currencies available, there are five top dogs that account for the majority of the foreign currency transfers and exchanges. Today we examine the big five and what makes them so popular.
It probably comes as no surprise to anybody that the U.S. dollar holds the top spot. It is the standard currency for most commodities and known as the unofficial global currency. In addition, it is often used as the intermediary in multi-currency exchanges. The USD is held by nearly every central bank and large investment agency for stabilization purposes as it is subject to minimal inflation.
Numerous other countries such as Panama, Cambodia, Zimbabwe, Ecuador and a number of Caribbean countries use the USD as an official currency and many more use a technique known as dollarization to keep the value of their money pegged against it. Even in countries where it’s not the official currency, it is often accepted happily.
Recently created in 1999, the Euro has become a force to be reckoned with on the international currency market. It is the world’s second largest reserve currency and has a higher value than the USD. Every year more and more countries in Europe enter the euro zone to stabilize and improve their economies.
A number of countries in Africa have begun to peg their currency against the Euro for the same reason other countries peg theirs against the USD; to protect against inflation and stabilize the exchange rate. Despite being one of the world’s youngest currencies, it is one of the most trusted and becoming the one with the largest amount of cash currently in world circulation.
Japan became an economic powerhouse in the 1980s and has managed to keep their place as a player on the global economy despite recent woes. It is the most traded Asian currency although the Chinese Yuan is rapidly making a name for itself. One of the reasons for the Yen’s popularity was its zero interest rate policy for the majority of the 1990s and 2000s. Many currency traders and large investment firms would borrow the Yen at a minimal cost and use it to invest in higher yielding currencies.
The GBP is the world’s oldest currency still in circulation and was the most powerful player until the end of WWII. While its value has dropped on some occasions, it is currently worth more than the USD and the Euro. It’s another commonly held reserve currency because of its high value against other world currencies.
The U.K. is the only member of the euro zone that still uses its own currency. They do this to control their own domestic interest rates. It’s extremely liquid and has a high trading volume in the Forex market. Known for being more volatile than the Euro, it offers great investment opportunities for those knowledgeable of world politics and changing economic winds.
The Swiss Franc is an unusual player on this list. It’s the only economy in the top 5 with a G.D.P that measures in the billions instead of trillions. They have managed their place as one of the world’s top converted currencies because of their neutral stance on most world events and their reputation as a safe haven for investors. They have one of the world’s most stable economies, but are highly dependent on foreign investment.
Its minimal volatility on the Forex market makes it a good place for foreign currency investors to park their funds between trades. Another interesting thing to note is that the Swiss National Bank is actually a specially regulated corporation and its monetary policies are governed by the heads of three major corporate Swiss banks.
We can see from the distinctly separate properties of each of the top five most traded currencies that the each has a different function on the world’s currency exchange market. Despite having very separate properties, the fate of each is affect by, and intertwined with, the others. Every movement in a currency on the Forex market has a correlated reaction from the others. The newness of the Euro shows us the foreign exchange market and world currency scene is ever evolving. Understanding the motivating factors behind these changes, opens up the opportunity for significant financial gains by the savvy investor.