The 6 Most-Traded Currencies And Why They're So Popular

The forex market is the world's largest and most liquid market, with trillions of dollars traded on any given day between millions of parties. For those just getting started in the forex market, one of the first steps is to gain familiarity with some of the more commonly traded currencies and their popular uses in not only the forex market but in general as well. Let's take a look at several popular currencies that all forex observers should be acquainted with and some of the underlying traits and characteristics of each. (Learn about the forex market and some beginner trading strategies to get started. For more, see Forex Trading: A Beginner's Guide.)
TUTORIAL: Introduction to Currency Trading

1. The U.S. Dollar

First and foremost is the U.S. dollar, which is easily the most traded currency on the planet. The USD can be found in a pair with all the other major currencies and often acts as the intermediary in triangular currency transactions. This is all because the USD acts as the unofficial global reserve currency, held by nearly every central bank and institutional investment entity in the world. (For more, see Profiting From A Weak Dollar.)

In addition, due to the U.S. dollar's global acceptance, it is used by some countries as an official currency, as opposed to a local currency, a practice known as dollarization. As well, the U.S. dollar may be widely accepted in other nations, acting as an informal alternative form of payment, while those nations maintain their official local currency.

The dollar is also an important factor in the foreign exchange rate market for other currencies, where it may act as a benchmark or target rate for countries that choose to fix or peg their currencies to the USD's value. For instance, as of 2011, China has its currency, the renminbi, still pegged to the dollar, much to the disagreement of many economists and central bankers. Quite often countries will fix their exchange rates to the USD to stabilize their exchange rate, rather than allowing the free (forex) markets to fluctuate its relative value. (For more, see The Pros And Cons Of A Pegged Exchange Rate.)

One other feature of the USD that is important for novices in forex to understand is that the dollar is used as the standard currency for most commodities, such as crude oil and precious metals. So what's important to understand is that these commodities are subject to not only fluctuations in value due to the basic economic principals of supply and demand but also the relative value of the U.S. dollar, with prices highly sensitive to inflation and U.S. interest rates, which directly affect the dollar's value.

2. The Euro

Although relatively new to the world stage, the euro has quickly become the second most traded currency behind only the U.S. dollar. As well, the euro is the world's second largest reserve currency. The official currency of the majority of the nations within the eurozone, the euro was introduced to the world markets on January 1, 1999, with banknotes and coinage entering circulation three years later.

Along with being the official currency for most eurozone nations, many nations within Europe and Africa peg their currencies to the euro, for much the same reason that currencies are pegged to the USD- to stabilize the exchange rate..

With the euro being a widely used and trusted currency, it is very prevalent in the forex market, and adds liquidity to any currency pair it trades within. The euro is commonly traded by speculators as a play on the general health of the eurozone and its member nations. Political events within the eurozone can often lead to large trading volumes for the euro, especially in relation to nations that saw their local interest rates fall dramatically at the time of the euro's inception, notably Italy, Greece, Spain and Portugal. The euro may be the most "politicized" currency actively traded in the forex market. (For more, see Top 7 Questions About Currency Trading Answered.)

3. The Japanese Yen

The Japanese yen is easily the most traded currency out of Asia and viewed by many as a proxy for the underlying strength of Japan's manufacturing-export economy. As Japan's economy goes, so goes the yen (in some respects). Many use the yen to gauge the overall health of the Pan-Pacific region as well, taking economies such as South Korea, Singapore and Thailand into consideration, as those currencies are traded far less in the global forex markets.

The yen is also well known in forex circles for its role in the carry trade. With Japan having basically a zero interest rate policy for much of the the 1990s and 2000s, traders have borrowed the yen at next to no cost and used it to invest in other higher yielding currencies around the world, pocketing the rate differentials in the process. With the carry trade being such a large part of yen's presence on the international stage, the constant borrowing of the Japanese currency has made appreciation a difficult task. Though the yen still trades with the same fundamentals as any other currency, its relationship to international interest rates, especially with the more heavily traded currencies such as the greenback and the euro is a large determinant of the yen's value. (For more, see The U.S. Dollar And The Yen: An Interesting Partnership.)

4. The Great British Pound

The Great British pound, also known as the pound sterling is the fourth most traded currency in the forex market,. It also acts as a large reserve currency due to its relative value compared to other global currencies. Although the U.K. is an official member of the European Union, it chooses not to adopt the euro as its official currency for a variety of reasons, namely historic pride in the pound and maintaining control of domestic interest rates. For this reason, the pound can be viewed as a pure play on the United Kingdom. Forex traders will often base its value on the overall strength of the British economy and political stability of its government. Due to its high value relative to its peers, the pound is also an important currency benchmark for many nations and acts as a very liquid component in the forex market. (For more, see The Greatest Currency Trades Ever Made.)

5. The Swiss Franc

The Swiss franc, much like Switzerland, is viewed by many as a "neutral" currency. More correctly, the Swiss franc is considered a safe haven within the forex market, primarily due to the fact that the franc tends to move in a negative correlation to more volatile commodity currencies such as the Canadian and Australian dollars, along with U.S. Treasury yields. The Swiss National Bank has actually been known to be quite active in the forex market to ensure that the franc trades with a relatively-tight range, to reduce volatility and keep interest rates in line. (This is the relationship between the euro and the Swiss franc currency pairs. For more, see Forex: Making Sense Of The Euro/Swiss Franc Relationship.)

6. The Canadian Dollar

Last on our list we take a look at the Canadian dollar, also known as the loonie. The loonie is probably the world's foremost commodity currency, meaning that it moves in step with the commodities markets, notably crude oil, precious metals and minerals. With Canada being such a large exporter of such commodities the loonie is very volatile to movements in their underlying prices, especially crude oil. Traders often trade the Canadian dollar to speculate on the movements of these commodities or as a hedge to their holdings of those underlying contracts.

Additionally, being located in such close proximity to the world's largest consumer base, the United States, the Canadian economy, and subsequently the Canadian dollar is highly correlated to the strength of the U.S. economy and movements in the U.S. dollar as well. (For more, see Canada's Commodity Currency: Oil And The Loonie.)

The Bottom Line

As we have seen, every currency has specific features that affect its underlying value and price movements relative to other currencies in the forex market. Understanding what moves a currency and why is a pivotal step in becoming a successful participant in the forex market. (For more, see Using Pivot Points In Forex Trading.)

by Investopedia Staff

Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.

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Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.

The History Of Money From Barter To Bank Notes

Money, in and of itself, is nothing. It can be a shell, a metal coin, or a piece of paper with a historic image on it, but the value that people place on it has nothing to do with the physical value of the money. Money derives its value by being a medium of exchange, a unit of measurement and a storehouse for wealth. Money allows people to trade goods and services indirectly, understand the price of goods (prices written in dollar and cents correspond with an amount in your wallet) and gives us a way to save for larger purchases in the future.
Money is valuable merely because everyone knows everyone else will accept it as a form of payment - so let's take a look at where it has been, how it evolved and how it is used today. (To learn more about money itself, see What Is Money?)

A World Without Money

Money, in some form, has been part of human history for at least the last 3,000 years. Before that time, it is assumed that a system of bartering was likely used.

Bartering is a direct trade of goods and services - I'll give you a stone axe if you help me kill a mammoth - but such arrangements take time. You have to find someone who thinks an axe is a fair trade for having to face the 12-foot tusks on a beast that doesn't take kindly to being hunted. If that didn't work, you would have to alter the deal until someone agreed to the terms. One of the great achievements of money was increasing the speed at which business, whether mammoth slaying or monument building, could be done.

Slowly, a type of prehistoric currency involving easily traded goods like animal skins, salt and weapons developed over the centuries. These traded goods served as the medium of exchange even though the unit values were still negotiable. This system of barter and trade spread across the world, and it still survives today on some parts of the globe.

Oriental Cutlery

Sometime around 1,100 B.C., the Chinese moved from using actual tools and weapons as a medium of exchange to using miniature replicas of the same tools cast in bronze. Nobody wants to reach into their pocket and impale their hand on a sharp arrow so, over time, these tiny daggers, spades and hoes were abandoned for the less prickly shape of a circle, which became some of the first coins. Although China was the first country to use recognizable coins, the first minted coins were created not too far away in Lydia (now western Turkey).

Coins and Currency

In 600 B.C., Lydia's King Alyattes minted the first official currency. The coins were made from electrum, a mixture of silver and gold that occurs naturally, and stamped with pictures that acted as denominations. In the streets of Sardis, circa 600 B.C., a clay jar might cost you two owls and a snake. Lydia's currency helped the country increase both its internal and external trade, making it one of the richest empires in Asia Minor. It is interesting that when someone says, "as rich as Croesus", they are referring to the last Lydian king who minted the first gold coin. Unfortunately, minting the first coins and developing a strong trading economy couldn't protect Lydia from the swords of the Persian army. (To read more about gold, see What Is Wrong With Gold?)

Not Just a Piece of Paper

Just when it looked like Lydia was taking the lead in currency developments, in 600 B.C., the Chinese moved from coins to paper money. By the time Marco Polo visited in 1,200 A.D., the emperor had a good handle on both money supply and various denominations. In the place of where the American bills say, "In God We Trust," the Chinese inscription warned, "All counterfeiters will be decapitated."

Europeans were still using coins all the way up to 1,600, helped along by acquisitions of precious metals from colonies to keep minting more and more cash. Eventually, the banks started using bank notes for depositors and borrowers to carry around instead of coins. These notes could be taken to the bank at any time and exchanged for their face values in silver or gold coins. This paper money could be used to buy goods and operated much like currency today, but it was issued by banks and private institutions, not the government, which is now responsible for issuing currency in most countries.

The first paper currency issued by European governments was actually issued by colonial governments in North America. Because shipments between Europe and the colonies took so long, the colonists often ran out of cash as operations expanded. Instead of going back to a barter system, the colonial governments used IOUs that traded as a currency. The first instance was in Canada, then a French colony. In 1685, soldiers were issued playing cards denominated and signed by the governor to use as cash instead of coins from France.

Money Travels

The shift to paper money in Europe increased the amount of international trade that could occur. Banks and the ruling classes started buying currencies from other nations and created the first currency market. The stability of a particular monarchy or government affected the value of the country's currency and the ability for that country to trade on an increasingly international market. The competition between countries often led to currency wars, where competing countries would try to affect the value of the competitor's currency by driving it up and making the enemy's goods too expensive, by driving it down and reducing the enemy's buying power (and ability to pay for a war), or by eliminating the currency completely.
Despite many advances, money still has a very real and permanent effect on how we do business today. (Follow the development of money in the United States in The History Of Money: Currency Wars.)

by Andrew Beattie

Andrew Beattie is a former managing editor and longtime contributor at Investopedia.com. He operates the Wandering Wordsmith blog, and can be reached there.

Read more: http://www.investopedia.com/articles/07/roots_of_money.asp?partner=fxweekly12#ixzz1frCtudBT

Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.

Currency Positions You Can Take Now

Bank for International Settlements (BIS) data indicate that the global foreign exchange markets boast over $4 trillion in average daily trading volume, making it the world's largest financial market.

The forex market entices traders of all levels, from novices just learning about the financial markets to well-seasoned professionals. With nearly round-the-clock trading sessions, access to considerable leverage and low costs, it is relatively easy to enter the forex arena. Current economic conditions and volatility in the overall markets, however, can be intimidating to the forex trader. Fortunately, traders have a variety of choices, including more conservative plays, when it comes to investing in currencies. (If forex interests you read How To Become A Successful Forex Trader.)

TUTORIAL: Forex Tutorial

Foreign Currency Certificates of Deposit

The interest rates in the U.S. are so low right now that it is difficult to make any money off certificates of deposit (CD). That said, they do offer a safe place for money; investors may not earn much, but they will not lose any money either. Another option for certificates of deposit that may provide the opportunity to earn higher interest rates is the foreign currency CD.

EverBank offers a WorldCurrency CD that earns interest rates based on the local rates of a specific country or a basket CD that offers exposure to a variety of currencies. These foreign currency CDs are subject to fluctuations in exchange rates, but generally offer higher interest rates than dollar-denominated CDs. Investors can lose money if the dollar strengthens against the foreign currency as the CD matures.
Only U.S.-based FDIC-insured banks should be used; in fact, many websites that offer foreign currency CDs at fantastic rates are scams. The FDIC insurance protects against bank insolvency, but not against the currency price fluctuations so money can be lost in this type of CD.

Currency Exchange Traded Funds

Exchange traded funds, commonly referred to as ETFs, are investment funds that are traded on a stock exchange. Investors have a wide variety of ETFs from which to choose including those that track a major market Index, target gold or track a basket of foreign currencies. Currency ETFs provide investors with exposure to a particular currency or a basket of currencies, allowing access to multiple foreign currencies.

In 2005, Rydex SGI launched CurrencyShares Euro Trust (NYSE:FXE), the first currency exchange-traded fund. Since then, there has been significant growth in the entire currency ETF market, with assets of all funds now totaling more than $6 billion. Approximately 40 funds are now available that offer investors currency exposure.

The largest of the currency ETFs is the PowerShares DB U.S. Dollar Index Bullish (NYSE:UUP) with $1.05 billion in net assets. Incidentally, an advantage in trading ETFs is that they can be shorted, so investors could actually short the bullish fund if they felt the dollar was headed down. The fund invests by going long USDX futures contracts (to replicate the performance of being long the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc). (To learn more about Currency ETF, read Profit From Forex With Currency ETFs.)

Emerging Markets

The demand for U.S. currency has waned worldwide as developing economies like China begin to pay for cross-border transactions using domestic currency rather than dollars. As the demand abroad decreases, the supply of dollars has grown as a result of the Federal Reserve Board's second round of quantitative easing efforts that pumped a total of $900 billion into the money supply. The changing climate has some foreign exchange investors looking towards new markets for trading opportunities.

Investors and traders can play the emerging markets in a number of ways, including emerging market exchange traded funds or directly in an emerging economy's currency, such as the Hong Kong dollar, Singapore dollar, South African rand and the Brazilian real.

WidsomTree Dreyfus Emerging Currency Fund (NYSE:CEW), for example, has more than $599 million in net assets and is an actively managed fund that invests in eight to 12 emerging markets currencies currently including those found in Latin America (Brazilian real, Chilean peso and Mexican peso); Europe, Middle East and Africa (Polish zloty, Russian ruble, South African rand and Turkish new lira) and Asia (Chinese yuan, Indian rupee, Indonesian rupiah, Malaysian ringgit and South Korean won).

Currency Futures

Currency futures are futures contracts where the underlying commodity is a currency exchange rate. These contracts offer investors the ability to enter the foreign exchange market in an environment that is similar to other futures contracts. Currency futures, also called forex futures or foreign exchange futures, are exchange-traded futures contracts to buy or sell a specified amount of a particular currency at a set price and date in the future. Like other futures products, currency futures are traded in terms of contract months with maturity dates falling in March (H), June (M), September (U) and December (Z).

Popular currency futures contracts include:

- AUD/USD Futures (Australian dollar/US dollar)

- CAD/USD Futures (Canadian dollar/US dollar)

- EUR/USD Futures (Euro/US dollar)

- GBP/USD Futures (British pound/US dollar)

- CHF/USD Futures (Swiss franc/US dollar)

- EUR/GBP Futures (Euro/British pound)

- EUR/CHF Futures (Euro/Swiss franc)

- EUR/JPY Futures (Euro/Japanese yen)

- JPY/USD Futures (Japanese yen/US dollar)

- NZD/USD Futures (New Zealand dollar/US dollar)

An advantage in trading the currency futures markets is that they are regulated the same way as other futures markets. They have a great deal more oversight than the spot forex market which is largely unregulated. Currency futures brokers must follow regulations enforced by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).

The Bottom Line

The foreign currency market is the largest financial market in the world. Investors who are interested in exposure to this market have many options. Each investor should adequately research investment opportunities and consult with a qualified advisor before making any investment decisions. (To start investing in forex, see Getting Started In Forex.)

Posted: August 30, 2011 10:02AM by Jean Folger

Please note: At the time of publication, the author did not hold any positions in any instrument mentioned in this column

Source : http://financialedge.investopedia.com/
Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.

The Swiss Franc: What Every Forex Trader Needs To Know

Foreign exchange, or forex, trading is an increasingly popular market for investors and speculators. The markets are huge and liquid, trading occurs on a 24-hour basis, and there is enormous leverage inherent in the system. Moreover, it is opportunity to trade on the relative fortunes of countries and economies as opposed to the idiosyncrasies of companies. (For related reading, see 10 Ways To Avoid Losing Money In Forex.)

TUTORIAL: Introduction To Currency Trading

Despite many attractive characteristics, the foreign exchange market is vast, complicated and ruthlessly competitive. Major banks, trading houses and funds dominate the market and quickly incorporate any new information into the prices.

Foreign exchange is not a market for the unprepared or ignorant. To effectively trade foreign currencies on a fundamental basis, traders must be knowledgeable when it comes to the seven major currencies. This knowledge should include not only the current economic stats for a country, but also the underpinnings of the respective economies and the special factors that can influence the currencies.

Introduction to the Swiss Franc

Switzerland has seemingly always had an outsized significance to the global financial community, and its currency is no exception. The Swiss franc is the sixth-most traded currency on the foreign exchange markets, even though its economy (in nominal GDP) ranks just 19th in the world. Despite a long-held reputation for conservatism and prudence, the Swiss franc is not a common reserve currency. (For related reading, see Forex: Making Sense Of The Euro/Swiss Franc Relationship.)

The central bank behind the Swiss franc is the Swiss National Bank. As befits the country's reputation for sober and conservative economic management, the SNB does target a consistent inflation rate of around 2%. Generally speaking, the SNB does not engage in stimulative monetary policy in response to economic downturns.

The Economy Behind the Franc

Switzerland's economy is small overall, but it has some outsized significance in the global banking community.

Financial services make up more than 11% of Switzerland's GDP and the country's strict policies regarding neutrality and bank secrecy have made it an exceptionally popular destination for global funds. While Switzerland has been cajoled into rolling back some of its secrecy, there are widespread rumors that as much as one-third of the world's offshore funds are held in Swiss banks. Due in part to its neutrality and its long reputation as a banking center, the Bank For International Settlements is based in Basel. (Learn the underlying theories behind these concepts and what they can mean for your portfolio. For more, see The Importance Of Inflation And GDP.)

Although Switzerland's central bank targets stability in prices, stability in growth has eluded the country. GDP growth has gone negative four times in the last 20 years and has frequently been below 2% a year. Switzerland has indeed been quite successful at controlling inflation over the last 20 years, however, and debt (as a percentage of GDP) has held steady around 55% for a number of years.

Switzerland does boast an exceptionally low rate of unemployment and though manufacturing has been in long-term decline, the country is still competitive in some industries like chemicals, pharmaceuticals and electric machinery. That said, services (particularly financial services) are a major component of the economy and a major factor in the high per-capita income of Swiss citizens.

Drivers of the Franc

There are several theories that attempt to explain foreign exchange rates. Purchasing power parity, interest rate parity, the Fisher effect and balance of payments models all offer explanations of the right exchange rate based upon factors like relative interest rates, price levels and so forth. In practice, these models do not work especially well in the real market – real market exchange rates are determined by supply and demand, and that include a variety of market psychology factors. (4 Ways To Forecast Currency Changes will introduce you to four of the most popular methods for forecasting exchange rates.)

Major economic data includes the release of GDP, retail sales, industrial production, inflation and trade balances. These come out at regular intervals and many brokers, as well as many financial information sources like the Wall Street Journal and Bloomberg, make this information freely available. Investors should also take note of information on employment, interest rates (including scheduled meetings of the central bank) and the daily news flow – natural disasters, elections and new government policies can all have significant impacts on exchange rates.

Trading in the Swiss franc is certainly influenced by the global demand for Switzerland's services as a confidential offshore holding area for funds. The franc also trades as a more stable alternative to the dollar, euro or British pound in times of turbulence and uncertainty. While there are really not enough francs in circulation to use it as an alternative to these currencies, traders and speculators nevertheless seem to prefer the franc when conditions get dicey in other economies.

Carry Trade

When talking about the carry trade (which involves borrowing in a currency with low interest rates and using it to buy government debt in a currency with high rates), most of the conversation revolves around the Japanese yen. Nevertheless, the Swiss franc is also a significant player in the carry trade due to the low rates, stability and liquidity. Carry trades with the Swiss franc often involve the euro or pound, and traders must keep an eye the interest rates in those areas as they can influence demand for the franc. (For more on currency carry trading, see Currency Carry Trades 101.)

Unique Factors for the Swiss Franc

Switzerland's famous neutrality is a significant factor in its economy and currency. Though Switzerland harmonizes many of its policies with the Eurozone countries, it is not a member and it maintains its independence. What's more, as a global destination of choice for expatriated capital, Switzerland is less sensitive to the economic performance of its neighbors.

Switzerland does have some risks with its heavy reliance on its banking sector. Under pressure from countries like the United States and Germany, some of Switzerland's bank secrecy laws have been relaxed. That is likely a concerning development for dictators, criminals and businessmen who want to keep their wealth both safe and secret. As a result, other countries like Singapore have begun tightening their rules and promoting themselves as emerging alternatives to Switzerland for offshore accounts.

Another odd aspect to the Swiss franc is that, in many ways, it is a currency and not a country. While the U.S. dollar is certainly boosted by its heavy weighting as a reserve currency and its safe haven status, trade in the dollar is still largely dictated by the economic conditions of the United States. For the Swiss franc, it sometimes seems that only the interest rate decisions of the SNB really matter. Perhaps this is because Swiss governments have maintained largely consistent economic policies (no one expects anything wild from the Swiss), or perhaps it is because demand for the Swiss franc is dominated more by its utility as a liquid, stable and reliable alternative currency. (For more on the U.S. dollar, see The U.S. Dollar: What Every FX Trader Needs To Know.)

The Bottom Line

Currency rates are notoriously difficult to predict, and most models seldom work for more than brief periods of time. While economics-based models are seldom useful to short-term traders, economic conditions do shape long-term trends.

As Switzerland is not likely to move away from its conservative low-growth, low-debt philosophy and is likely to remain a key banking center, the fundamental supports for the franc seem to be firmly in place. What's more, so long as Switzerland's policies continue to result in low rates, it is likely to remain an attractive option in carry trades and a currency with a significance far outstripping the size of its home economy. (For related reading, see Play Foreign Currencies Against The U.S. Dollar - And Win.)

by Stephen D. Simpson, CFA

Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.

Source : Read more: http://www.investopedia.com/articles/forex/11/swiss-franc-primer.asp?partner=fxweekly10#ixzz1dMERpIgs

Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.