The forex market or the foreign exchange market is the largest financial market in the world where traders exchange different currencies and speculate on their price against other currencies. So at the heart of the forex market we have nothing but currencies and more currencies!
But they are not single standing currencies. We cannot speculate the price of a currency against itself. That is not impossible. We need a yardstick. A criterion or index against which we can make comparisons and vary out our speculations. This is where currency pairs come in.
In this article we will examine currency pairs in the forex market with a special interest in currency pairs that involve the US dollar and go through a list of the top dollar currency pairs in the foreign exchange market.
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What Are Forex Currency Pairs and Their Composition?
In order to discuss the best currency pairs in the forex market that involve the US dollar, we must first discuss pairs in general.
The forex market is a decentralized global market comprising numerous sessions or “markets” around the world where foreign currencies are basically traded with each other. But it is not the conventional form of trade where you basically give one to receive the other. The forex market is where traders speculate on the price of foreign currencies rather than exchanging them with each other directly.
In order for traders to be able to speculate on the price of currencies, we have something known as currency pairs. As the name suggests, each pair is made from two foreign currencies. As we said we will focus especially on the pairs that involve the US dollar and introduce the best and most traded dollar currency pairs. But what is inside a pair?
A currency pair or trading pair in the forex market has two currencies where the first one is known as base currency and the second one is known as quoted currency. In any pair the base currency is denominated by the second currency. It means if we go long, it means we want to speculate how much base currency we can purchase with the quoted currency. And if we go short in the forex market we want to speculate on how much base currency we can sell for the quoted currency.
This relationship is really important to understand if you want to be a profitable forex trader. You also need to understand the relationship between currencies themselves and the factors that could influence them. We will talk about both of these in the next sections.
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How Are Forex Currency Pairs Influenced?
Foreign currencies are not standalone units of financial prowess unaffected by external factors. On the contrary. Currencies are directly at the mercy of their parent economy and also the global economic and geopolitical events.
Knowing what factors influence foreign currencies is the most important tool that you can have in order to choose the best pair for trading. Not all pairs have the same weight when it comes to profitability and trading prospects. At certain times it might be more profitable to trade a certain pair than others.
We mentioned that currencies are at the mercy of their economy more than anything else. And this is exactly where you can find out about which pair to trade and which one to avoid.
Look for the economic data and see what they suggest. If, for instance, the US is showing falling GDP rates and the feds are going to jack up the interest rates at the same time, while the US is indirectly involved in global conflicts, then it might be reasonable to anticipate that the value of the US dollar might decrease just a little bit. Of course this is just an example. You can think about the same terms for other currencies.
This is known as fundamental analysis. By executing such analysis properly you can find the best and most profitable trading pairs in forex. Or you can just check out our list below!
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Top Currency Pairs with US Dollar in forex
As we discussed so far, there are countless foreign currency pairs in the forex market made from many different currencies in the world. But perhaps the most important pairs are those involving the US dollar. These are powerful pairs that have a major and substantial share of the traded volume in the forex market.
The following is a list of the top and most traded dollar currency pairs in the forex market:
- EUR/USD: standing on the very top of the list we have the pair EUR/USD which makes up for the most trading volume in the forex market. In fact, almost one fourth of all trading volume is for this pair alone.
- GBP/USD: second on the list is the pair made up of the British pound and the US dollar. This pair also has a really high trading volume and so it also has a very high liquidity in the market.
- USD/JPY: this dollar pair has the only Asian currency on our list. This is of course the US dollar and the Japanese Yen. Their trading volume share has been on the rise in recent years and has surpassed many of the other major pairs in the market.
- AUD/USD: this pair is made from the Australian dollar and the US dollar. A peculiar feature of this pair is that it is heavily impacted by fundamental factors, since Australia is mostly an exporting company and its economy directly drives its currency value.
- USD/CAD: fifth on the list we have the pairing between the US dollar and the Canadian dollar. Given these countries’ close proximity, they have a lot of trade between them which also impacts their respective currency, especially the Canadian side.
- USD/CHF: last but not least, we have the pair made from the US dollar and the Swiss Franc. Given the global and regional role of Switzerland as an economic powerhouse, it is understandable why the pair of Swiss Franc and the US dollar is such a powerful and highly traded pair.
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Conclusion
The forex market functions by traders making speculations about the value of foreign currencies against other foreign currencies. This is done with the help of foreign currency pairs. These pairs are as diverse as the currencies that are found all over the world. But the most important and the most traded pairs are those involving the US dollar. In this article we went through the concept of trading pairs and what influences them. We also presented you with a list of the most traded dollar pairs in forex.
