There is an interesting distinction between the forex and many other markets. Since it is an international currency market, it’s not as if there is a specific location you can point to. The same way that there is an actual physical location for the New York Stock Exchange, or the fact that you can actually VISIT Wall Street – the same isn’t possible with the forex market. It is a 24/7 market that takes place EVERYWHERE, and isn’t centralized in any location, and any trader with the access to funds and an internet connection can trade it!
Now, of course, the obvious question arises: what currencies are the most traded? This is important to know because this helps to know where exactly the money is always flowing. This is especially important to organizations and institutions that are trading massive amounts of money every day, because they, of course, want to be able to exit their position gracefully without having the amount of money affect the price where they are able to exit.
Since TWO currencies are necessary in the forex market (currency pairs), it’s important to note that the percentage will add up to 200%, which of course, is counterintuitive. Let’s break down the most traded currencies in the world.
First and foremost, is the almighty United States dollar. This shouldn’t come as too much of a surprise to anyone, considering that the U.S. remains the most powerful economy in the world. Second, is the euro. Third, is the yen. Specifically, the dollar clocks in at roughly 85% of all transactions, the euro at 39%, and the yen at 19%
FOREX liquidity: Dollar
The United States dollar certainly is considered “number 1” when it comes to the forex market, and this fact should be known to every forex trader before entering it. The global market has to reflect the global economy, and the fact of the matter is that the dollar simply cannot be denied. The major currency pairs account for the vast majority of the money traded in the forex market, and you will find the dollar time and time again. Is this viable to change? Sure, anything can happen…but unless there is a large geopolitical shift, it is safe to say that the dollar will remain king for a while to come.
Why is this? Well, consider this fact by the IMF, or the International Monetary Fund. For those that don’t know, the IMF is an international organization that was designed specifically to ensure financial stability for the majority of the world, and the high-ranking people in the organization are generally considered some of the most important people in the world, as they seek to prevent economic crises from happening globally. Anyway, the IMF estimates that the U.S. dollar is responsible for somewhere around 64% of the world’s official foreign exchange reserves. The fact of the matter is that if a certain currency is this widely held by central banks and government, well, it makes sense why it is so clearly sovereign when it comes to the forex market, and the #1 currency.
It is also not simply one reason why the dollar is number one, either. There are all sorts of factors that contribute to this. First and foremost, the United States is politically stable. Secondly, they are the world’s largest military superpower. The forex trader should understand that these geopolitical situations greatly affect the market, and these are also important factors that play into why the dollar is king. The dollar is also the currency used for many commodities in general. One quick example would be oil. Oil is priced in U.S. dollars, or “petrodollars”, so even if two countries that aren’t the United States want to make an exchange of oil, it will STILL use the dollar. It is this tradition that only strengthens the dollar’s power as the medium of exchange.
For those that are still unclear, liquidity in a market means that there is a constant demand and supply. This can prove to be a problem with certain stocks, where investors are unsure about earnings, or management. This is not an issue when it comes to forex, as currencies are always “in demand”, and massive amounts of money can be exchanged without affecting the price. The fact of the matter is that no matter how rich you are, it is extremely difficult to trade a certain amount of money, even in a small period of time, that is going to affect the way that the market values two different currencies of entire countries! This should help to make sense to some people why larger organizations and institutions value the liquidity of the forex market rather than the unknowns that accompany the stock market.