There are 180 currencies that are currently in active circulation around the globe. Majority of the transactions done in the foreign exchange market are only done with the use of around half a dozen of these currencies. If you are familiar with the Pareto principle, this would make a very good real-world application. In this article, you will be given an overview of the currencies that currently dominate the foreign exchange market.
There following are the five most traded currencies in forex backed up with the reasons for their popularity:
The United States Dollar: There is no doubt about US dollar’s dominance as a currency. Truth be told, this currency does not have any serious kind of competition. This popularity can be attributed to the long term government stability and the economic dynamism of the United States. It has a very consistent value due to the fact that it is not very much affected by inflation over a long period of time. Many foreign governments are literally holding on to their dollars as their reserve currency mainly because this is the currency used for international transactions. The US dollar, needless to say, is on the pedestal and its status as a currency cannot be paralleled – well, to be precise, not yet.
The Euro: The US dollar as a primary currency definitely needs a second currency. Surprisingly, this currency is one of the youngest and it is considered as the official currency from Finland to Portugal and from Slovakia to Slovenia. The euro is the next most traded of all the currencies of the world. Currently, there are about 500 million people residing across Africa and Europe who use the currency for trading. The importance of euro, with time, is likely to increase.
The Japanese Yen: Currently, the Japanese yen has gained so much ground because its value has tripled. With that, Japanese firms took the advantage to purchase several positions related to purchasing in many institutions in the United States. With these current developments, the yen gradually became one of the most important currencies used in the foreign exchange market.
The British Pound: The pound has somewhat lost its glory. A few decades back, it is the second most widely used currency, but with the decline of the British Empire and the rise of the Euro, the pound took the backseat. Today, only six percent of all the foreign exchange transactions use the pound for trading. If you are wondering why pound suddenly fell to fourth place, the best answer will be due to the fact that it is in a relative vacuum. The government of the United Kingdom fixed its price relative to the dollar and this is not good because it no longer reflects the currency’s actual importance.
The Australian dollar: This currency is created in 1966 as a replacement to the Australian pound which is now obsolete. Ever since then, it became one of the most popular reserve currency that is traded throughout Oceania and the Asia-Pacific region. It slowly became one of the most favored currencies for trading.
Foreign exchange in the 21st century moves towards diversity. Investors are looking into the currency’s stability and volatility. Also, the economy’s reputation and security as a nation also matters in the process of choosing. Finally, another factor that is considered is the extent by which the currency is used.
Source: www.mtrading.ng , A Nigerian Forex broker.