There are many official currencies that are used all over the world, but there only a handful of currencies that are traded actively in the Forex market. In currency trading, only the most economically/politically stable and liquid currencies are demanded in sufficient quantities. For example, due to the size and strength of the United States economy, the American dollar is the world's most actively traded currency.
In general, the eight most traded currencies (in no specific order) are the U.S. dollar (USD), the Canadian dollar (CAD), the euro (EUR), the British pound (GBP), the Swiss franc (CHF), the New Zealand dollar (NZD), the Australian dollar (AUD) and the Japanese yen (JPY).
The exchange rate of one currency to another one is set as a result of the interaction between demand and supply. This is usually called a quote.
There are two quote types: direct and indirect.
A direct quote is an amount of domestic currency required to buy or sell one unit of the foreign currency. Most currency pairs are direct quotes of the US dollar against currencies of various countries.
- USD/RUR – 33.70; it means one US dollar equals 33.70 Russian rubles;
- USD/CHF – 1.2350; one US dollar makes up 1.2350 Swiss francs.
An indirect quote is a domestic exchange rate quoted as the foreign currency per unit of the domestic currency. Historically, the British pound, euro, Australian and New Zealand dollars as well as some other currencies have indirect quotes.
- EUR/USD – 1.2570; one euro costs 1.2570 US dollars;
- GBP/USD – 1.8420; one pound sterling costs 1.8420 US dollars.
Besides, there are cross pairs excluding the US dollar. For instance: EUR/JPY, GBP/CHF etc.
There are three types of currency pairs:
Major currency pairs have high liquidity, they are traded most and by a vast number of players. The majors include seven pairs which are represented by a quote of the US dollar and a currency of one of the world’s most significant countries. The majors are called so because the currencies they include are considered to be the most stable.
- EUR/USD – euro/US dollar;
- GBP/USD – pound/ US dollar;
- AUD/USD – Australian dollar/ US dollar;
- NZD/USD – New Zealand dollar/ US dollar;
- USD/JPY – US dollar/ yen;
- USD/CHF – US dollar/ franc;
- USD/CAD – US dollar/ Canadian dollar.
Currency pairs which exclude the US dollars are called crosses. They are less active than the majors. This group includes:
- CAD/JPY – Canadian dollar/ Japanese yen
- CHF/JPY – Swiss franc/ Japanese yen
- EUR/AUD – euro/ Australian dollar
- EUR/CAD – euro/ Canadian dollar
- EUR/CHF – euro/ Swiss franc
- EUR/GBP – euro/ British pound
- EUR/JPY – euro/ Japanese yen
- EUR/NZD – euro/New Zealand dollar
- GBP/AUD – British pound/ Australian dollar
- GBP/CHF – British pound/ Swiss franc
- GBP/JPY – British pound/ Japanese yen
- NZD/JPY – New Zealand dollar/ Japanese yen