What determines the value of currency in the forex exchange market? If you do know the answer, good for you, if you don't, well there are certain conditions that vary such as economic or social factors i.e. GDP growth or unemployment caused by a pandemic, respectively. Research more on that. In this blog update, we will focus on the popular currencies that you will face and understand what affects their value.
USD - US Dollar
The US Dollar dominates the world foreign exchange market heavily. The US Dollar is the base or universal currency to evaluate any other currency traded on forex. Almost all currencies are generally quoted in US dollar terms. The US dollar currently represents about 86% of all foreign exchange market transactions. Most commodities (metals, oil etc.) are traded with prices denominated in US Dollars; as a result, any fluctuations in supply and demand of these commodities have direct impact on the value of US Dollar. This happened in 2008 financial crisis when oil prices collapsed and the EUR/USD climbed. As US dollar is considered as the safe-haven currency. Therefore, investors move towards the dollar when economic conditions deteriorate.
EUR - Euro
The Euro is the second most dominating currency in the forex market. Like the US Dollar, the Euro also has a strong international acceptance streaming from the members of the European Monetary Union. The Euro is used by 18 member countries of the European Union and is currently accounted for almost 37% of all forex transactions. The main factors that influence the acceptance of Euro’s prices are often based on well established economies (developed countries) that use the common currency, such as France and Germany. Euro prices depend on key countries (like Germany) Consumer Price Inflation (CPI), the European Central Bank, unemployment rate, and exports data. The Euro is the common currency of all the European countries and there is a difference between these countries’ economies, as was highlighted during the 2011 debt crisis. This restricts the dominance of Euro in the global forex market. In the event of problems, EU leaders have a hard time finding common solutions that are beneficial to both the large and small economies.
JPY - Japanese Yen
The Japanese yen is the most traded and dominating currency in the Asian forex market. It is the third most popular or traded currency in the forex market and represents almost 20% of the world’s exchange. The natural demand to trade the Yen comes mostly from the Japanese Keiretsu, the economic and financial conglomerates. The Japanese stock market, .i.e., the Nikkei index and real estate market correlate with the volatility of the Japanese yen (JPY). Because the Japanese economy is mostly an industrial exports economy, the Japanese currency (JPY) among traders and investors is considered as a safe-haven currency in periods when risk aversion hits the market. Low interest rates in Japan allows traders to borrow at low cost and invest in other countries. The JPY’s currency risks are related to the constant devaluation of the currency and the interventions of the country’s central bank. Because japan is an export oriented economy, the central bank is constantly trying to weaken its currency.
GBP - Great British Pound
The British Pound is the UK’s currency. Until the end of World War II, the pound continued to have the same dominance in forex market what is US dollar today and was the currency of reference. The currency (GBP) is heavily traded against the euro and the US dollar but has less presence against other currencies. The British Pound (GBP) is the fourth most traded currency internationally and about 17% of all transaction is done through GBP in global forex market. Because London is considered as the forex market hub globally, 34% of all forex transaction pass through London City. The fundamental factors that affect the pound are as complex and varied as the British economy and its influence on the world. Inflation, country GDP and the housing market influence the pound value. Forex traders sometimes use the pound as an alternative to the euro especially when the European Union’s problems become too bad.
CHF - Confoederatio Helvetica Franc or Swiss Franc
The Swiss Franc is the currency and legal tender of Switzerland. The currency code for Franc is CHF and the most popular Switzerland franc exchange rate is the CHF/EUR pair. It is also, the only currency of a major European country that neither belongs to the European Union nor to the G-7 countries. Though the size of the Swiss economy is relatively small, the Swiss franc is one of the four major currencies traded in the forex market, closely resembling the strength and quality of the Swiss economy and finance. The CHF is also considered as the safe-haven currency and investors move towards it during periods of risk aversion: the Swiss economy and its foreign reserves mainly gold (7th largest reserve in the world) add to the currency’s credibility. The CHF prices depend on the central bank policy. The CHF tends to be more volatile compared to other major currencies due to lack of liquidity.
CAD - Canadian Dollar (CAD)
The CAD is a commodity driven currency. This is because the Canadian economy is export oriented and the main product of export is crude oil. Therefore, the Canadian Dollar prices are influenced by the price of crude oil
Global economic growth and technological progress help to make the CAD attractive to investors.