March 31, 2021 | by sandeep
The Almighty US Dollar (or the World’s Favorite Reserve Currency)
Among the world’s major currencies, the US dollar stands out as the strongest, biggest and main currency of the lot.
As you probably know by now, in the wonderful world of Forex, we pair every other major currency (euro, pound, yen, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar) with the US dollar.
Decoding Currency Nicknames
Also, it’s good to know that many of these major currencies have all sorts of interesting nicknames.
When we hear someone refer to the Buck or Greenback, they are referring to the US dollar. Did you know the latter moniker has to do with the green dye that they used to print currency during the Civil War back in the late 1800s?
Furthermore, the euro is also called Fiber, while the British pound sometimes goes by Cable. The Swiss Franc is known as Swissy in Switzerland and the Canadian dollar, the Loonie. And yes, before we forget, the New Zealand dollar is at times referred to as the Kiwi while its Australian counterpart as the Aussie.
Now some more interesting facts about these nicknames.
Do you know why the New Zealand dollar is called the Kiwi? It’s actually because of the kiwi bird on the $1 coin.
And there’s a similar story in Canada with the Loonie. The loon is a bird commonly found in Canada, which is also on their $1 coin.
Lastly, and probably most interesting, the Cable or GBP actually refers to the transatlantic telegraph cable that was laid down across the ocean floor connecting North America and Europe to facilitate communication between the two prior to the days of radio. So around the mid-to-late 1800s, the pound-dollar exchange rate was transmitted via this transatlantic cable and, even to this day, many people will refer to this currency pair as Cable.
Decoding Currency Acronyms
Furthermore, we know that these currencies’ symbols always show up as three letters. In most, we will find that the first two letters identify the name of the country and the third letter the currency’s name itself.
So, for example, the acronym USD identifies the United States in the first two letters while the third identifies the country’s currency, the dollar. Here are a few other examples: GB is for Great Britain and P for pound, NZ for New Zealand and D for dollar, and so on.
The major currency on our planet today is the US dollar.
Oil, gold, copper, Bitcoin, you name it. It’s all priced in dollars. So, when we mention major currencies and the most frequently traded currency pairs, we are really just talking about the dollar against the next seven major pairs like the EUR, GBP, JPY, CHF, CAD, AUD and NZD. So these are the most widely traded, the most liquid of all.
The most liquid of these seven would be the euro. Probably 30 percent of all Forex volume comes from euro vs. dollar or EURUSD. The one after that would be the Yen and then the British pound, with the Yen accounting for 15 to 20 percent followed by 10 percent or so for the pound. Then we’ve got the others, which are 3, 4 and 5 percent each. So, these major currency pairs make up between 60 to 78 percent of all Forex trades.
What are Currency Crosses?
The other 30 percent or so of Forex trades involve currency pairs that do not have the US dollar on the other side of the cross.
These pairings are known as crosses or a cross between two dollar pairs. So, technically, it’s not a dollar. For example, pound-yen or GBPJPY is a cross. It’s a cross between a pound-dollar or GBPUSD and a dollar-Yen or USDJPY.
Additionally, the GBPJPY isn’t actually a pound-yen. That’s why it’s called a cross; it’s a cross between the dollar-yen and the dollar-pound. They do not contain a dollar, but they are derived from their link to the dollar.
How is the pound-Yen’s price calculated?
Let’s say we’ve got the pound-dollar at 1.30 and the dollar-yen at 110. We use those two prices to calculate what the pound-yen price is going to be. So, what we do is, we multiply 1.30 by 110 and then times that by 100 and it will give you the pound-yen price.
So, the next time we look at the dollar-yen price on a chart, we should be able to convert our pounds to dollars and then convert them from dollars to yen. That’s what the pound-yen price is. Simple multiplication.
What are Exotic Currency Pairs?
Lastly, we’ve got something called exotic pairs.
These are simply one major currency versus a currency from an emerging market.
So, US dollar and Hong Kong dollar or USDHKD, for example. US dollar-Thai Baht or USDTHB, and US dollar-Mexican peso or USDMXN too.
These are pairs that don’t get traded as widely as the major and cross pairs and it’s not unusual to see a much wider spread between the buy and the sell prices compared to what we get on, say, the euro-dollar.
Other important currencies would be those for the BRICS group or the emerging markets. We’ve got B for Brazil, R for Russia, I for India and Indonesia, C for China and S for South Africa.
So the most frequently traded would be the seven major currencies that we’ve mentioned and we could probably also add to the list the Norwegian and Swedish Krona.
Why is the US Dollar the Most Important Currency in Forex?
As we’ve mentioned already, the US dollar is the most traded currency in the Forex market.
For a long time, the Bank of International Settlements (BIS) reported that probably around half of all reported transactions are in US dollars and that’s more than twice the euro, which is the next most frequently traded currency.
So it doesn’t take a genius to conclude that the US dollar is a pretty important currency to follow as a trader. And if you’re going to be a professional foreign exchange trader, then you should have a reasonably good understanding of what’s going on with the US economy.
Let’s share some statistics.
The global foreign exchange reserve figures from the International Monetary Fund (IMF) indicate that the US dollar comprises a huge amount of the world’s foreign exchange reserves. This is over 60 percent since almost every Central Bank and country in the world owns a lot of US dollars.
Your job as a currency trader is to understand why they’re holding this much currency, how much they’re going to want to buy in the future, or whether they’re going to want to buy less of it moving forward.
But why the US dollar?
There are a few reasons.
The US is the largest economy in the world in terms of nominal GDP, currently at over 19 trillion, which is approximately a quarter of the world’s gross product.
That’s a huge amount and one of the main reasons why other countries are so affected by what’s going on in the US economy. When something happens in the US economy, then it has a knock-on effect on other economies.
Take China, for example, which leapfrogged Japan a few years ago and became the second-largest economy in the world with a nominal GDP of 10 to 12 trillion. Although some people may look at China as the largest economy because they base it on the purchasing power of parity, the US economy is huge, and it is something we as currency traders need to pay considerable attention to.
Another reason why the US dollar is the world’s reserve currency is because every commodity is priced in US dollars.
If we are buying gold, oil, copper, silver, natural gas, cocoa, anything for that matter, and even if the deal has nothing to do with the US, it is still something that is dealt with in US dollars.
Let’s say Mexico wants to purchase oil from Saudi Arabia. They don’t pay for the oil in Mexican pesos and, funnily enough, they don’t even pay for it in Saudi riyal. See, oil is priced in dollars. So, if Mexico doesn’t have enough dollars in their reserve, then what they have to do is exchange Mexican pesos for US dollars to buy oil from Saudi Arabia.
Additionally, many investors want to purchase American bonds because the US is a very stable economy.
The US doesn’t tend to go through revolutions and military coups, not recently anyway.
They are also a military superpower, one that is unlikely to be invaded and conquered by any other country, which would obviously render their currency worthless.
So, these are obviously additional contributing factors to the US dollar being the world’s reserve currency.
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