Forex trading involves the trading of one currency for another. As currencies rise and fall in relation to one another Forex traders stand to either make or lose money. Yet not all currencies are created equal and not all currencies can be traded through the Forex market. This article will examine some of the most popular currencies in the Forex market.
In order for a currency to be traded through the Forex market it has to allowed to float in a free market. That means traders must be able to determine the exchange rate of a currency. Many currencies, however, are pegged to another, larger currency, such as the United States Dollar, or else tightly regulated by the government. For example, you might think that the Chinese Yuan would be among the most popular trading currencies, however, the Chinese government tightly regulates its currency, much to the disdain of other nations.
The most widely traded currency is the United States dollar. It was involved in 84% percent of daily trades in 2010, sometimes being sold and sometimes being bought. The U.S. dollar is widely considered the world's reserve currency and is often used to facilitate trade between countries, even those that do not use the dollar. For example, many high-value commodities, such as oil and gold, are almost exclusively exchanged in dollars on the global market. Interestingly, during the 2008 Financial Crisis, which started in the US, the dollar actually gained strength overtime as investors fled to what they regarded as the safest investment in the world: U.S. T-bills.
Before the recent Eurozone crisis many believed that the Euro could challenge the U.S. Dollar as the world's top reserve currency. In 2010 the Euro was involved in approximately 39% of all daily trades, making it a very popular currency. Before the Eurozone crisis the European Union had the largest integrated economy in the world and until the many underlying financial problems of some Eurozone countries became evident, it looked poised to post strong growth for years to come. The Euro had been making dramatic gains on the U.S. dollar in terms of value and many Forex traders felt its best years were still ahead. Yet after a series of poor fiscal choices and bad bets by major banks the Euro has been hammered. The Euro has lost a large portion of its currency and some even believe the currency could be dissolved in the near future.
With the Chinese Yuan essentially banned from trading, the Yen came in as the most popular Asian currency in 2010, being a part of 19% percent of all deals. The Japanese Yen is still a popular, strong, and stable currency in-spite of the fact that the Japanese government's debt levels exceed 200% of its GDP. These debt levels, combination with an aging population and increasingly less competitive business sector, are making some Forex traders question the long-term prospects of the Japanese Yen. Still, strong political leadership and a resilient, if uninspiring, economy have helped the Yen remain stable even in spite of the challenges faced by Japan.
Besides the already mentioned currencies there are numerous other small currencies that are also very popular in trading markets. The United Kingdom's Pound Sterling is involved in nearly 13% of all trades. The Singaporean Dollar, Swiss Franc, and Australian Dollar, are three other popular currencies frequently traded on Forex markets. Numerous other currencies are also traded. Forex traders must correctly predict which currencies will rise and fail and within what time frame. By being able to do so traders can earn huge profits.
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