The 7 most traded currencies in 2018 (and their main traits)

24 July 2018
Jesús Domínguez

The purpose of this article is to reveal which are the world’s most traded currencies in 2018, together with their main traits. This will reinforce your current forex knowledge and it’ll help you take one more step towards you becoming a successful and prestigious trader.


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The forex market is the largest and most liquid in the world, with trillions of dollars traded per day. Forex trading averaged $ 5.1 trillion per day ($ 5,100,000,000,000) in April 2016, according to the 2016 BIS (Bank for International Settlement) Triennial Central Bank Survey.

The vast majority of the trading activity is concentrated in large financial hubs located in the United Kingdom, the United States, Singapore, Japan, Hong Kong and Switzerland.

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What are the 7 most traded currencies in 2018 across the globe?

If you are starting to take your first steps as a forex trader, and you are dead set on becoming a successful trader, it is imperative that you get familiar with some of the most traded currencies worldwide and its main features.

1. The U.S. dollar ($) (USD)
2. The euro (€) (EUR)
3. The Japanese yen (¥) (JPY)
4. The pound sterling (£) (GBP)
5. The Australian Dollar ( $, A$ or AU$) (AUD)
6. The Canadian dollar ($, C$ or Can$) (CAD)
7. The Swiss franc (Fr., CHf, SFr) (CHF)


1. The U.S. dollar ($) (USD)

Usually referred to as the greenback in financial jargon, the US dollar remains the world’s most traded currency due to the long-term stability of the United States´ government and the U.S. economic dynamism.

Most of all cross-border trade and financial flows are now made in dollars. More than 84% of forex trading involves the U.S. dollar, and 38% of the world’s debt is issued in dollars. Therefore, foreign banks need plenty of greenbacks to transact business.

NOTE: during the 2008 financial crisis, non-US banks had $ 27 billion in international liabilities denominated in foreign currency, of which $ 18 billion were in US dollars!

Main traits of the U.S. dollar

Dollarization

Dollarization occurs when residents of a country extensively use the U.S. dollar, or another foreign currency, alongside or instead of the local currency. Unofficial dollarization occurs when individuals hold foreign-currency bank deposits or notes (paper money) to protect against high inflation in the domestic currency. Official dollarization occurs when a government adopts foreign currency as the predominant or exclusive legal tender.

Reserve currency

A reserve currency is one that’s held in significant quantities by governments and institutions as part of their foreign exchange reserves and is commonly used in international transactions and / or investments.

The US dollar is the most important reserve currency today mainly due to the legacy of the Bretton Woods system. Over the last few years, more than 60% of the total amount of international reserves have been in dollars, which makes it the de facto global currency, allowing the United States to have greater trade deficits with a limited economic impact as long as the largest foreign holders of dollars – China among others – continue to acquire debt denominated in USD.

Benchmark currency

From the end of World War II until around 1971, nearly all currencies were somewhat pegged to the USD, which was itself fixed to gold.

Nowadays, the dollar acts as a benchmark currency for certain countries that choose to fix their currencies to the value of the USD. This is the case of China, whose currency, the yuan or renminbi, has been pegged to the dollar for some time with the aim of stabilizing its exchange rate.

Benchmark pricing mechanism for most commodities

Another fundamental characteristic of the USD that forex newbies need to know is that the majority of commodities, such as crude oil and precious metals, are denominated in dollars. This implies that these assets are subject not only to fluctuations in value based on the law of supply and demand but also to the relative value of the US dollar so that their prices are susceptible to inflation and US interest rates since these directly affect the value of the dollar. Therefore, when the value of the dollar drops, it’ll cost you more dollars to buy commodities.


2. The euro (€) (EUR)

Despite having been the last to arrive, replacing the French franc, the German mark or the Italian lira, the euro has become the second most traded and reserve currency worldwide, right behind the hegemonic U.S. dollar, and is the most tangible proof of European integration: adopted by 19 out of 28 EU countries and used by 338.6 million people every day.

A little bit of history

The Treaty of Maastricht of 1992 laid the foundations for an economic and monetary union and put on the table an idea widely debated in European territory for several years: the issuance of a common currency.

Although the name ‘euro’ came into effect in December 1995, it was not until January 1999 when it was introduced -only for electronic transfers and traveller’s checks- and not until 2002 that euro coins and banknotes were launched causing the biggest cash changeover in history in 12 EU countries.

Speculates on the general health of the eurozone and its member nations

Traders speculate with the euro based on the general health of the eurozone, its member countries, as well as the important political and economic events that occur within its borders, which usually involve significant trading volumes in the single currency

Benchmark currency

In addition to being the official currency of most nations in the eurozone, many European and African countries fix their currencies to the euro to stabilize their exchange rate. As it is the case with the USD.

Outside the eurozone, a total of 22 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro, including 14 countries in continental Africa, two African island countries, three French Pacific territories and three Balkan countries.

The main reason why a country with a weak and vulnerable economy decides to fix its currency to a more stable one is due to a security measure. The euro is considered a stable currency with which the country pegging its local currency to it may prevent galloping inflation and might manage to attract foreign direct investment into the country.


3. The Japanese yen (¥) (JPY)

The Japanese yen is the most traded currency in Asia and is seen by many as an indicator of the underlying strength of Japan’s manufacturing and export economy.

Many use the JPY to measure the overall health of the Pacific region as well, taking into account economies such as South Korea, Singapore and Thailand, since their local currencies are traded much less in the international foreign exchange markets.

The yen is represented by the symbol ¥, its currency code is JPY, and is pronounced “en” in Japanese, which means “round or circle”.

Carry trade currency

The yen is also well known in forex circles for its prominent role in carry trade*. Since the interest rates of the Bank of Japan have remained at 0%, or even negative during the last two decades due to stagnation, traders borrow yen at a low interest rate and exchange it for a currency that pays a high interest rate. Therefore, traders receive high interest rates on the money traded, but pay low interest rates on the money borrowed benefiting from this kind of arbitrage.

Given that the carry trade is a crucial factor in the presence of the yen in the international scene, the constant borrowing of the Japanese currency has made its appreciation, based on fundamentals, a challenging task. Although the yen continues to trade with the same fundamentals as any other currency, its relationship with international interest rates, especially with the most traded currencies, such as the USD or the EUR, makes this factor a great determinant of the yen’s final value.

* Carry trade is a strategy in which an investor borrows money at a low interest rate to invest in an asset that is likely to provide a higher return. This strategy is prevalent in the foreign exchange market. This strategy relies on relative stability in asset prices, as an adverse exchange rate movement can quickly wipe out the returns from the underlying interest rate differential.

Safe haven currency

Historically, the Yen has been a safe haven currency since it has remained stable enough to keep its value compared to other currencies in times of economic uncertainty, inflation and other forms of crisis, a time when most traders are risk averse.


4. The pound sterling (£) (GBP)

Why the name “pound sterling”?

A pound coin originally weighed one troy pound of sterling silver, giving the currency the name “pound sterling”. “Sterling silver” means mixed metal that has 92.5% or more real silver. One pound sterling was originally divided by 240 sterling pence. This was because there are 240 pennyweights in a troy pound, so a single one–pound coin weighed one troy pound and a single 1–penny coin weighed one pennyweight.

For some decades it was the second most important currency, but the decline of the British Empire, as well as the rapid rise of the euro, caused the pound sterling to lose some of its luster of yesteryear. Despite this fact, the GBP continues to occupy a relevant position worldwide due to, among other things, London being the financial capital of Europe.

EU member (until March 2019) with no euro

Although the United Kingdom is an official member of the European Union – at least until Brexit comes into force, scheduled for March 2019 – it chose not to adopt the euro as an official currency for different reasons, including the historical pride of the pound for the British and the fact that they wanted to keep their monetary policy under their control.

Finally, it is worth noting that the pound is one of the few currencies that is worth more than the USD.


5. The Australian Dollar ( $, A$ or AU$) (AUD)

Although the AUD was recently created -1966- as a replacement for the Australian pound, it quickly became one of the most popular currencies in the entire Asia-Pacific region due to the stability of the Australian economy.

It has always been a favorite for carry trading

The Australian dollar is very popular among currency carry traders, as the interest rate of the Royal Bank of Australia is usually higher than its peers.

Besides, the Australian dollar generates interest in the trading community due to its diversification power (exposure to Asian economies and the economic cycle of commodities).

Heavily dependent on commodities

The Australian dollar bears a closely-related tie with commodities, especially silver and gold, so the AUD’s health, even though Australia enjoys a certain degree of independence from the other major world economies, is closely linked to these two commodities.

This means that the control of interest rates and inflation in Australia can also be aggravated by the country’s high dependence on the evolution of commodities and a relatively small industrial/manufacturing base, which has led to significant current account deficits in its most recent history.

Take advantage of the strong correlation between gold and AUD

There’s been a historical relationship between Australia’s currency and the spot price of Gold (Australia produced about 9% of the world’s gold).

When there’s such a tight correlation between Gold and the AUD, it might be an excellent opportunity to establish a pair trading strategy.

Although a pair trading strategy is most used in trading the stock market, the same principles can be applied to any other instruments. Simply put, pair trading refers to simultaneously buying a stock (or any other instrument) and selling a related stock (or any other instrument).

Since Gold and AUD/USD are highly correlated, should the correlation breaks down, let’s say Gold rallies, but Aussie doesn’t follow Gold and moves down, you could exploit this divergence by shorting Gold (the strongest instrument) and at the same time going long AUD/USD (the weakest instrument). Once both Gold and Aussie reverts to the statistical mean, a profit can be made out of these trades.


6. The Canadian dollar ($, C$ or Can$) (CAD)

Also known as the loonie*, the Canadian dollar is probably the most important commodity currency in the world, which means that it moves in step with commodity markets, especially crude oil, precious metals and minerals.

* Due to the image of a loon in the one dollar coin, traders and currency analysts sometimes refer to the CAD as the loonie, a common and well-known bird in Canada.

most traded currencies 2018

“Cruderrency”

Given that Canada is a large exporter of crude oil, the Canadian dollar is very volatile to movements in its underlying price, and traders often trade the Canadian dollar to speculate on the evolution of crude or as a hedge, where a trader can be long in the CAD and short in oil importers, such as Japan.

Highly correlated with the US economy

Being located so close to the largest consumer base in the world, the United States, both the Canadian economy and the Canadian dollar are highly correlated with the strength of the American economy and the US dollar.


7. The Swiss franc (Fr., CHf, SFr) (CHF)

And last but not least on our list is the Swiss franc, seen by many as a “neutral” currency, since it was one of the few currencies that was not pegged to the USD after World War II, declining to sign the Bretton Woods agreement.

Safe haven currency

The Swiss franc is one of the safe haven currencies par excellence in the forex market since it tends to move in the opposite direction to currencies / assets that rise in value during the expansion phase of the economic cycle. Also, it is notorious that the Swiss National Bank does not hesitate to intervene its currency to ensure that the franc operates within a relatively narrow range or to avoid a never-ending appreciation in case of financial turmoil.

Carry Trade

When we talk about carry trading -a strategy in which a trader sells a low-interest-rate currency and buys the one offering a higher rate of interest benefiting from the difference in the exchange rates-, most of the traders think in the Japanese yen. However, the Swiss franc is also a major carry trade player due to a policy of low rates, economic stability and high liquidity.

Value not dictated by economic conditions

Another aspect to highlight of the Swiss franc is that its value does not seem to depend on the economic fundamentals of Switzerland, as it can be the case with other currencies, but it appears that the primary driver of the CHF is the Swiss National Bank policy on interest rates.

This may be because the demand for the franc is strongly linked to being a liquid, stable and trustworthy currency in case of a financial crisis.


Conclusion

In this article, we have seen the 7 most traded currencies in 2018, as well as the specific drivers that affect their underlying value. Understanding the reasons why a currency ebbs and flows is a fundamental step to become a successful trader in the forex market.


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