Foreign Exchange, Forex, FX

The most crucial component of the foreign exchange market is forex currency, which is bought and sold in this marketplace. The transaction of FX currency involves the exchange of currencies of various nations. Fluctuations in the value of a currency against that of another offer forex traders opportunities to earn profits.

Although the currency of any nation can be exchanged in the forex market, there are a few that are considered major currencies, as they dominate the world's foreign transactions. The value of other currencies is typically considered against these major currencies.
Forex Currency: Major Currencies

The most popular FX currency is the US dollar (USD). This currency is involved in over 80% of the forex trades. With the collapse of the gold standard and the adoption of the Bretton Woods system in 1944, the US dollar became the world’s reserve currency. All currencies were valued in terms of the US dollar.

The Euro (EUR) is the currency of the Eurozone, which consists of 15 member states. With over €610 billion in circulation as of December 2006, the Euro has exceeded the US dollar in terms of total cash in circulation. The value of the Euro has been affected by factors such as unstable growth rates and unemployment.

The next most common FX currency is the Great British Pound (GBP), or Pound Sterling. Its popularity has been severely affected by the rising popularity of the US dollar. The Great British Pound is traded heavily against the Euro and the US dollar. This currency is also called "cable," as it was the first currency to be traded in the forex market through trans- Atlantic cables.

The Japanese yen (JPY) is the third most-traded currency in the forex market, next only to the US dollar and the Euro. The yen has featured prominently in the carry trade for years. However, yen carry trade started unwinding when the Financial Crisis of 2008 onwards caused all countries to reduce their interest rates. This has lead to the strengthening of the yen, despite Japan’s economy being in dire straits.

The Swiss Franc (CHF) is considered as a safe currency due to the nation’s neutral and independent economic policies and private banking system. The currency lacks liquidity, which has made it highly volatile.

The Working of Forex Currency

Forex currencies are always traded in pairs. The rate at which a currency pair is traded is known as its exchange rate. While there could be countless currency pairs, the following account for about 70% of the total daily trade in the forex market.

    * Euro/US Dollar - EUR/USD

    * Great Britain Pound/US Dollar - GBP/USD

    * US Dollar/Confoederatio Helvetica Franc - USD/CHF

    * US Dollar/Japanese Yen - USD/JPY

The first currency appearing in a currency pair is called the reference currency or the base currency. The second currency in the pair is known as the quote currency or the counter currency.

When an exchange occurs, the amount of the transaction is quoted in the reference currency, while the result of the transaction (profit or loss) is expressed in the quoted currency.