An individual looking to invest in Forex needs to identify the dominant currencies in this market and the key currency pairs. Currency investments offer significant diversification benefits for portfolios of individual investors. A due diligence conducted on behalf of the investor in this regard is sure to reap benefits in future forex trading.
Key Currency Trends
The major currencies in the foreign exchange market are basically the ones in which most of the currency trades are established. These key currencies include the US Dollar, the European Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Australian Dollar and the Swiss Franc.
The US dollar is the benchmark against which other major currencies are traded in the foreign exchange market, in particular the Yen, the Euro and the British pound. Often referred to as the greenback, due to its color, the US dollar has been the dominant currency of global foreign exchange reserves. However, in the recent past the US dollar has lost ground to the euro on account of current account imbalances in the US. The euro’s share of the global foreign exchange reserves increased from 18% in early 1999 to close to 25% by end 2003.
Currency Pairs – What are they?
A currency pair represents a quotation of one currency in terms of another. The first currency mentioned in the pair is the base or transaction currency. The second currency in the pair is known as the quote or counter currency. Such a quotation indicates how many units of the counter currency would be required to purchase a single unit of the base currency.
For example, the quote for the EUR/USD currency pair indicates how many US dollars are needed to purchase one euro.
Currency Pairs – The BIG Ones
There are six key currency pairs that form about 90% of the daily trading activity in the Forex market. These include:
- EUR/USD – Euro vs. US Dollar
- GBP/USD – British Pound vs. US Dollar
- USD/CHF – US Dollar vs. Swiss Franc
- JPY/USD – Japanese Yen vs. US Dollar
- USD/CAD – US Dollar vs. Canadian Dollar.
- AUD/USD – Australian Dollar vs. US Dollar
For a new entrant in the Forex market, it is extremely important that he/she focuses on a single currency pair, with the ideal one being EUR/USD, since this has a small spread. When the bid/ask prices are on an upswing, it indicates that the counter currency is weakening and the base currency is strengthening.