Currencies

Currencies

There are numerous currencies that traders use to develop a portfolio, but most currency traders will concentrate on a few of the most widely traded, and liquid pairs such as the EUR/USD, GBP/JPY, or USD/CHF.

Reserve Currencies

These are the currencies of nations which have a dominant role in global economic transactions. The European Union, Japan, the United States are the important players in the FX market. The role of the Japanese Yen as a reserve currency has been diminishing since the 90’s, while that of the Euro has been increasing continuously since the launch of the currency. Among all those changes however, the US Dollar has remained as the one major currency that has the greatest dominance over other currencies. With about two thirds of global forex reserves defined in the dollar, the USD is the reserve currency of the world.

Commodity Currencies

Currencies such as the Australian and Canadian Dollars, the Brazilian Real, the South African Rand, or the Russian Ruble are the monetary units of commodity exporting nations, and thus are referred to as commodity currencies. There’s a great degree of diversity among commodity currencies in terms of trade balance or economic sophistication. However, due to the large currency inflows generated by proceeds from the sales of commodities, the value of these currencies is strongly dependent on the buoyancy of global commodity market.

Exporter Currencies

Singapore, Japan, China, and other countries with large forex reserves accumulated through exports, are called exporter currencies. The value of these currencies is related strongly to the health of the global economy. As they depend on foreigners for economic buoyancy, any disturbance to the health of the global financial system can have outsized consequences for these nations.

High-Risk Currencies

These may also belong to any of the other categories. High-risk currencies are the currencies of nations with high deficits (budget or trade), and high interest rates. Examples are Romanian Leu, currencies of Baltic nations, or Turkey. These currencies appreciate at times of boom, as capital from developed economies is directed to their assets, and depreciate during recessions and crises, as global capital discards risky assets.



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