The foreign exchange market, also known as the forex market, is the largest and most liquid financial market in the world. It involves the exchange of currencies between different countries, and it is essential for international trade, investment, and tourism. In the forex market, there are eight major currencies that are traded against each other. These currencies are the US dollar, Euro, Japanese yen, British pound, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar. In this article, we will explore why forex uses these eight currencies.
1. Economic size and stability
The eight currencies that are traded in the forex market are the most stable and economically significant currencies in the world. The economies of the United States, Eurozone, Japan, United Kingdom, Switzerland, Canada, Australia, and New Zealand are among the largest and most stable in the world. These countries have strong financial systems, stable currencies, and low inflation rates. This makes their currencies highly attractive to investors and traders.
2. Liquidity
Liquidity is an essential aspect of the forex market. It refers to the ease with which a currency can be bought or sold without affecting its price. The eight currencies that are traded in the forex market are highly liquid. This means that there are always buyers and sellers willing to trade these currencies, which ensures that the market is always active and efficient.
3. Accessibility
The forex market is accessible to traders all over the world, and the eight currencies that are traded in the market are widely used and accepted. These currencies are used in international trade and investment, and they are also commonly used for tourism and travel. This makes them easily accessible and tradable for traders in different parts of the world.
4. Interconnectedness
The economies of the world are highly interconnected, and the eight currencies that are traded in the forex market are closely linked to each other. For example, the US dollar is the world’s reserve currency, and it is used to settle international trades and transactions. The euro is used by many countries in Europe, and it is also used as a reserve currency by some central banks. The Japanese yen is widely used in Asia, and it is also used as a funding currency for carry trades. The British pound is used in the UK and other parts of the world, and it is also used as a reserve currency by some central banks. The Swiss franc is known for its stability and is often used as a safe-haven currency. The Canadian dollar, Australian dollar, and New Zealand dollar are all commodity currencies, as they are closely linked to the prices of commodities such as oil, gold, and iron ore.
5. Diversification
The forex market is highly competitive, and traders need to diversify their portfolios to manage risk effectively. The eight currencies that are traded in the forex market provide traders with a diverse range of options for trading. Traders can choose to trade the most liquid currencies such as the US dollar and euro or the more volatile currencies such as the Australian dollar and New Zealand dollar. This provides traders with the flexibility to create diversified portfolios that can help them manage risk effectively.
In conclusion, the eight currencies that are traded in the forex market are the most stable, liquid, and economically significant currencies in the world. These currencies are widely used and accepted, easily accessible, and closely linked to each other. They also provide traders with a diverse range of options for trading, which helps them manage risk effectively. The forex market has become an essential part of the global financial system, and the use of these eight currencies has played a key role in its growth and success.
