Currencies trade in pairs primarily because each national currency’s value is measured against the value of another currency, rather than against an objective hard currency like gold or another valuable commodity.
This fact results in a rate of exchange for the currency pair that is generally equal to how many units of the counter currency make up one unit of the base currency. It is this market determined forex rate that fluctuates and provides trading opportunities.
The seven most active currency pairs traded in the forex market ordered by trading volume include:
The U.S. Dollar has historically been the most traded currency in its role as the world’s primary reserve currency, in part because it holds a privileged position with the International Monetary Fund and the World Bank. Also, some key strategic commodities like gold and oil are also commonly traded in U.S. Dollars.
The importance of the Dollar continues to be felt, with over 86% of all forex transactions made on a daily basis involving the currency. Although other currencies do trade against each other as cross rates, most dealing still occurs against the U.S. Dollar.
Furthermore, the Dollar only acts as the counter currency against the Euro, the Pound Sterling, the Australian Dollar and the New Zealand Dollar. In all other currency pairs, it acts as the base currency.
Currency pairs have their own characteristics and behavior patterns, each with unique qualities and acting as their own financial instrument, although correlations with other pairs often exist.
These qualities, behaviors and correlations should be thoroughly researched before any attempt is made to trade the currency pair.
Below find a brief description of the most actively traded currency pairs: