Major Currencies of the world

The US Dollar is by far the most widely traded currency. In part, the widespread use of the US Dollar reflects its substantial international role as “investment” currency in many capital markets, “reserve” currency held by many central banks, “transaction” currency in many international commodity markets, “invoice” currency in many contracts, and “intervention” currency employed by monetary authorities in market operations to influence their own exchange rates. In addition, the widespread trading of the US Dollar reflects its use as a “vehicle” currency in foreign exchange transactions, a use that reinforces its international role in trade and finance. For most pairs of currencies, the market practice is to trade each of the two currencies against a common third currency as a vehicle, rather than to trade the two currencies directly against a common third currency as a vehicle, rather than to trade the two currencies directly against each other. The vehicle currency used most often is the US Dollar, although very recently euro also has become an important vehicle currency. Thus a trader who wants to shift funds from one currency to another, say from Indian Rupees to Philippine Peos, will probably sell INR for US Dollars and then sell the US Dollars for Peos. Although this approach results in two transactions rather than one, it may be the preferred way, since the US Dollar/INR market and the US Dollar/Philippine Peos market are much more active and liquid and have much better information than a bilateral market for the two currencies directly against each other. By using the US Dollar or some other currency as a vehicle, banks and other foreign exchange market participants can limit more of their working balances to the vehicle currency, rather than holding and managing many currencies, and can concentrate their research and information sources on the vehicle currency. Use of a vehicle currency greatly reduces the number of exchange rates that must be dealt with in a multilateral system. In a system of 10 currencies, if one currency is selected as the vehicle currency and used for all transactions, there would be a total of nine currency pairs or exchange rates to be dealt with (i.e. one exchange rate for the vehicle currency against each of the others), whereas if no vehicle currency were used, there would be 45 exchange rate to be dealt with. Thus, using a vehicle currency can yield the advantages of fewer, larger, and more liquid markets with fewer currency balances, reduced informational needs, and simpler operations. The US Dollar took on a major vehicle currency role with the introduction of the Bretton Woods par value system, in which most nations met their IMF exchange rate obligations by buying and selling US Dollars to maintain a par value relationship for their own currency against the US Dollar. The US Dollar was a convenient vehicle because of its central role in the exchange rate system and its widespread use as a reserve currency. The US Dollar’s vehicle currency role was also due to the presence of large and liquid US Dollar money and other financial markets, and in time, the EURO-US Dollar markets, where the US Dollars needed for (or resulting from) foreign exchange transactions could conveniently be borrowed (or placed). Other Major Currencies include: The EURO Like the US Dollar, the EURO has a strong international presence and over the years has emerged as a premier currency, second only to the US Dollar. The Japanese Yen The Japanese Yen is the third most traded currency in the world. It has a much smaller international presence than the US Dollar or the EURO. The Yen is very liquid around the world, practically around the clock. The British Pound Until the end of World War II, Pound was the currency of reference. The nickname Cable is derived from the telegrams used to update the GBP/USD rates across the Atlantic. The currency is heavily traded against the EURO and the US Dollar. But it has a spotty presence against other currencies. The two year bout with the Exchange Rate Mechanism, between 1990 and 1992, had a soothing effect on the British Pound, as it generally had to follow the Deutsche Mark’s fluctuations, but the crisis conditions that precipitated the pound’s withdrawal from the Exchange Rate Mechanism has a psychological effect on the currency. The Swiss Franc The Swiss Franc is the only currency of a major European country that belongs neither to the European Monetary Union nor the G-7 countries. Although the Swiss economy is relatively small, the Swiss Franc is one of the major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland has a very close economic relationship with Germany, and thus to the EURO Zone. Typically, it is believed that the Swiss Franc is a stable currency; actually, from a foreign exchange point of view, the Swiss Franc closely resembles the pattern of the Euro, but lacks its liquidity.