Exotic currencies are defined as a currency that is both illiquid and thinly traded. This does not mean that it is a exclusively a “minor” or “major” currency compared to others. Some examples of minor currencies are the Australian, Canadian and New Zealand dollar. Some currencies that are considered major are the Japanese Yen, the Euro, the British Pound, the Swiss Franc and the Deutsche (German) Mark. In the eyes of the overall foreign exchange (forex) market, exotic currencies are just as important as these major currencies.
The importance of the forex market is highlighted by the fact that most major banks and central banks like that of the United State’s Federal Reserve depend on it as their sole domain. On an annual basis, these institutions regularly make substantial profits from the fluctuating forex market that is subsequentially extended to citizens and bank account holders.
As a result of the increases in international trade and foreign investments, countries have become gradually more dependant on each other. As such, other countries become sensitive to internal changes in another country’s economic activity which tends to alter and fluctuate the currency’s value and interest rate. As such, the monetary health of a country is linked to this currency and its performance.
Certain banks have been able to buy into foreign currencies with 20-30% of their funds, with the profits being responsible for 40-60% of their total margin. Until recently, the American public has been relatively unable to participate in this market. This is due to two main factors: accessibility to general traders and investors and minimum account requirements. The good news is that instead of the requisite $200,000 to open an account, a member of the public can open the account with less than $10,000, often much less. This has allowed for increased awareness and visibility of the currency market.
Five major currencies dominate the forex market: the U.S. dollar (USD), the British pound (GBP), the Japanese yen (JPY), the European euro (EUR) and the Swiss franc (CHF). These currencies are highly rated for their high volume of trade and market depth, so much that they account for the vast majority of the trading activity in North America alone. Minor currencies like the New Zealand dollar (NZD), Australian dollar (AUD), Canadian dollar (CAD) and the French franc (XPF) still carry a respectable activity rating and account for 3-7% of the total market volume despite the increased difficulty in trading these currencies. Together, minor and major currencies represent the stable currencies that are actively traded in the forex market.
Top three most traded currencies in the world:
The U.S Dollar Index is the rating that describes the relative strength of the Dollar. It is also responsible for reflecting the statistical weaknesses or strengths that the Dollar is trending towards. Simply put, if the index figure is tending towards a large growth the U.S Dollar is getting stronger. Likewise, if the Index drops then the U.S. Dollar is weakening. In the past twenty years, the Dollar has gradually dropped in its Index, reflecting an international mistrust of financial policies that result in large budget deficits.
Europe has taken movements toward what many economists term “Euroland” with the institution of a standard single currency, the Euro. Currently there are eleven nations that participate in the European Union: France, Spain, Belgium, Italy, Portugal, Austria, Finland, Luxembourg, Ireland, the Netherlands and Germany. With a total combined population of 300 million people they account for almost 20% of the world’s economy. Its also America’s largest foreign market, twice the size of Japan and Canada’s combined. Trade activity going back and forth between Europe and the U.S. has been in close balance for nearly a quarter of a century. In contrast, the U.S. runs large trade deficits against Asia.
Japan and its Yen continues to be one of the most stable and undisputed global economic strongholds of today’s market. Since World War II their government has applied all of its resources into developed a strong economy. As a result, the Yen has become the third most traded currency in the worldwide market.
