Major Currency Pairs and the Dollar Index for Forex
The main purpose of the Forex market is to facilitate the trading of currency pairs among market participants, an example of which is a multinational company that needs foreign currencies to pay for goods or services delivered by foreign suppliers. Nevertheless, there are countries whose currencies are more widely traded than others.
The seven (7) most commonly traded currency pairs can be grouped into four (4) “Majors” and three (3) “Commodity Pairs.” These pairs are the most liquid in the Forex market. The following four (4) pairs constitute 90% of Forex trades:
- The British Pound & US Dollar (GBP/USD)
- The Euro & US Dollar (EUR/USD)
- The US Dollar & Japanese Yen (USD/JPY)
- The US Dollar & Swiss Franc (USD/CHF)
- The three (3) Commodity Pairs are:
- The Australian Dollar & US Dollar
- The New Zealand Dollar & US Dollar
- The US Dollar & Canadian Dollar
The countries associated with the commodity pairs are major exporters of commodities. Both Australia and New Zealand are major exporters of Gold while Canada is a major exporter of Oil.
These Majors and Commodity Pairs (together with their combinations) make up 95% of all Forex transactions. To help you appreciate this number, bear in mind that the daily turnover of the Forex market amounts to roughly three (3) trillion dollars!
Currencies not listed above are traded on a smaller scale; accordingly, they are known as “Minor Currencies” in the Forex world.
The Dollar Index
In response to the “Nixon Shock” of 1971, the US Dollar Index (USDX) was established by the New York Board of Trade in 1973 in order to measure the performance of the US Dollar against a basket of six (6) other currencies. This basket includes the following currencies:
- Canadian Dollar, with a weight of 9.1%
- Euro, with a weight of 57.6%
- Japanese Yen, with a weight of 13.6%
- Pound Sterling, with a weight of 11.9%
- Swedish Krona, with a weight of 4.2%
- Swiss Franc, with a weight of 3.6%
The USDX is a key index, as the US Dollar is one of the “Majors.” A rising index signals increasing US monetary strength and opportunities for profit. It is possible to trade the USDX as:
- Exchange-Traded Funds (ETFs)
- Futures Contracts on ICE
- Mutual Funds
- Options
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