The main forex currencies

The forex currencies are influenced by a series of macro-economic conditions specific to each country, as well as the world's economic situation. Economic indicators (GDP growth, imports/exports), social factors (the unemployment rate, real estate market conditions) and the central bank's policy are the factors that determine the value of a currency on the foreign exchange market. The six major currencies each have their own distinct features:


The US dollar (USD):

The US dollar is the most traded currency in the forex market, it represents about 86% of all foreign exchange market transactions. It is also used as a measurement tool to evaluate other currencies and commodities.

The dollar dominates the foreign exchange reserves held by all countries - representing about 64% of world reserves. As a whole, there are several basic items that influence the US dollar. Most metals and oil are traded with prices denominated in US dollars; as a result, fluctuations in supply and demand in these markets have an immediate impact on the value of the currency, as happened in 2008 when the oil prices collapsed and the EUR/USD climbed to 1.60.

The dollar also benefits from its status as a safe haven, investors will flock towards the dollar when economic conditions deteriorate.

The Federal Reserve's interest rate has a huge influence on the currency. The Fed's reference rate decisions are influenced by inflation, employment and GDP, so the dollar is also influenced by these factors.

Other important factors for the USD are the United States' trade balance and its national debt. Typically, an increase in the trade deficit and growing national debt reduce the attractiveness of the US currency. However, sometimes the opposite can happen when the trade deficit and the debt are high, as investors often seek safety, which they perceive in the dollar.

The euro (EUR):

The euro is by far the latest currency on the forex market - it replaced the German deutschmark, which accounted for 25% of forex transactions before the creation of the euro. The euro is used by 18 of the European Union's member countries - it is the second most traded currency, representing around 37% of forex transactions.

The fundamental factors that influence the euro's prices are often based on the well-established economies that use the common currency, such as France and especially Germany. The main factors that affect the euro's performance are consumer price inflation and the interest rate set by the European Central Bank. Euro countries' export indicators and unemployment rates also tend to have an impact on the common currency's performance, since countries like Germany are major exporters of manufactured goods and technology. Europe remains dependent on energies such as Russian gas and oil from the Middle East, so higher demand for these products has a negative effect on the European currency.

Another problem regarding the euro is the difference between the various economies, as was highlighted by the 2011 debt crisis. In the event of problems, EU leaders have a hard time finding solutions that are beneficial to both the large and small economies. Until the sovereign debt crisis, the EUR was considered to be an alternative reserve currency to the USD. Unfortunately, problems with the economies peripheral to the EU have undermined this confidence in the euro.

The Japanese yen (JPY):

The Japanese yen is the strongest - and by far the most traded currency - in the Asian market. The yen is the third most traded currency, mainly in exchange for dollars and euros - it represents 20% of the world's exchanges. Demand for Japanese yen derives primarily from Japanese companies repatriating their commercial profits. The yen is therefore sensitive to the profitability of these companies and to the real estate market.

The Japanese economy is primarily oriented towards industrial exports. The JPY is greatly considered by traders to be a safe currency in periods when risk aversion hits the markets, but the currency is also used by carry traders when the appetite for risk appears. Low interest rates in Japan allow these traders to borrow money at a low cost in order to invest in other countries.

Japan's proximity and tensions with China can have a significant impact on the yen. The JPY's problems are related to the constant devaluation of the currency and the interventions of the central bank. The Bank of Japan is concerned about the yen's excessive appreciation (the Japanese currency tends to be rising a lot lately, due to economic uncertainty), which can adversely affect the nation's exports and economy. As a result, Japan is constantly trying to weaken its currency. Deflation hit Japan in the early 1990s after the bursting of the housing bubble in 1980, so this remains one of the greatest threats to Japan's future.

Due to the increasingly high number of elderly citizens and growing concerns about the future, it is difficult for the government to handle deflation.

The British pound (GBP):

The British pound is the UK's currency. The GBP is the most traded currency against the USD and EUR, and the fourth internationally, representing 17% of trading. 34% of forex transactions pass through London's "City", which is the currency market's main financial centre.

The fundamental factors that influence the pound are as complex and varied as the British economy itself and its influence on the world. London can still be considered to be a global financial capital, as its commodity market also plays a fundamental role in the evolution of the GBP. Inflation and GDP tend to strongly influence the pound, but the housing market is also important for the British currency.

Forex traders sometimes use the pound as an alternative to the euro during times when the European Union's problems become too severe. The GBP also tends to be influenced by political events - the currency typically reacts negatively to the uncertainty of events such as elections.

The Swiss franc (CHF):

Switzerland is a small country located in the European Alps, yet its strong international trade and its inflows of money make the Swiss franc one of the major currencies traded on the forex market.

The CHF is another popular currency during periods of risk aversion: the Swiss economy and its huge gold reserves (seventh largest reserve in the world, despite Switzerland's small size) add to the currency's credibility.

Like the JPY, the CHF suffers from the central bank's interventions. The Swiss National Bank went as far as anchoring the CHF to the euro on 6 September 2011, thereby creating constant downward pressure on the currency.

The CHF is seen as a sort of safe haven. Its economy is stable but does not justify its place among the major currencies. Thanks to the favourable reputation of its banking system, many investors secure their assets by buying CHF. The Swiss franc tends to be more volatile due to its lack of liquidity in relatin to other major currencies.

The Canadian dollar (CAD):

because the Canadian economy is export-oriented, the Canadian dollar is considered to be a "commodity currency". As most of Canada's exports go to the United States, Canada's economy and its currency are dependent on the neighbouring country. The main export is crude oil, so the Canadian dollar is therefore influenced by the price of crude.

Global economic growth and technological progress tend to make the CAD attractive to investors. On the other hand, global and national economic problems can have an adverse effect on the CAD.

The most traded currencies on the forex market in 2020

The most often traded currency pairs are the EUR/USD (approx. 28% of all volume), the USD/JPY (approx. 13%), the GBP/USD (approx. 11%), the AUD/USD (approx. 6%), and the USD/CAD (approx. 5%).

main currencies traded

The most traded currencies in 2020

currency volumes

The most volatile currency pairs in 2020

Currency pair volatility