Currencies trade in pairs primarily because each national currency’s value is measured against the value of another currency, rather than against an objective hard currency like gold or another valuable commodity.
This fact results in a rate of exchange for the currency pair that is generally equal to how many units of the counter currency make up one unit of the base currency. It is this market determined forex rate that fluctuates and provides trading opportunities.
Most Active Currency Pairs
The seven most active currency pairs traded in the forex market ordered by trading volume include:
- EUR/USD – E.U.’s Euro against the U.S. Dollar
- USD/JPY – U.S. Dollar against the Japanese Yen
- GBP/USD –U.K.’s Pound Sterling against the U.S. Dollar
- USD/CHF – U.S. Dollar against the Swiss Franc
- AUD/USD – Australian Dollar against the U.S. Dollar
- USD/CAD – U.S. Dollar against the Canadian Dollar
- NZD/USD – New Zealand Dollar against the U.S. Dollar
The U.S. Dollar’s Importance
The U.S. Dollar has historically been the most traded currency in its role as the world’s primary reserve currency, in part because it holds a privileged position with the International Monetary Fund and the World Bank. Also, some key strategic commodities like gold and oil are also commonly traded in U.S. Dollars.The importance of the Dollar continues to be felt, with over 86% of all forex transactions made on a daily basis involving the currency. Although other currencies do trade against each other as cross rates, most dealing still occurs against the U.S. Dollar.
Furthermore, the Dollar only acts as the counter currency against the Euro, the Pound Sterling, the Australian Dollar and the New Zealand Dollar. In all other currency pairs, it acts as the base currency.
Description of Most Active Currency Pairs
Currency pairs have their own characteristics and behavior patterns, each with unique qualities and acting as their own financial instrument, although correlations with other pairs often exist.
These qualities, behaviors and correlations should be thoroughly researched before any attempt is made to trade the currency pair.
These qualities, behaviors and correlations should be thoroughly researched before any attempt is made to trade the currency pair.
Below find a brief description of the most actively traded currency pairs:
- EUR/USD – makes up the number one volume leader in the forex market, accounting for over 27% of total forex trading volume, according to the Bank for International Settlements or BIS. The economies that comprise the Eurozone collectively make up the largest economy in the world by GDP, with the United States second largest.
- USD/JPY – Dollar Yen accounts for over 13% of total daily forex volume and is the second most actively traded currency pair. The Japanese economy ranks as the third largest in the world by GDP.
- GBP/USD – The U.K. Pound Sterling versus the U.S. Dollar rate is the third most actively traded currency pair with 12% of total daily forex volume. This currency pair lacks liquidity at times and may have wild swings, so trading it is probably best left to seasoned traders.
- USD/CHF – Once considered a safe haven currency due to its former convertibility to gold, the Swiss Franc now accounts for just 5% of total forex daily trading volume.
- AUD/USD – This currency pair trades often closely with the commodities market, especially the price of gold, because Australia’s economy is primarily based on the mining and export of natural resources.
- USD/CAD – Another commodity currency, the U.S. Dollar versus the Canadian Dollar rate follows and reacts to the crude oil market.
- NZD/USD – This pair also often trades with commodity prices. The New Zealand Dollar has gained a larger following as a trading currency in the forex market than the small country’s size would suggest.
