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It is common for currencies to be traded in pairs. A typical pair would be EUR/USD, which means Euro over US dollars. The Euro is the base currency in this case, since it is the first currency. In a pair, USD is the default counter currency, while EUR is called the quote currency. A pair is defined as the amount required to purchase one unit of the second currency based on the fact that the first currency is the base currency.
You must buy the EUR and sell the USD simultaneously in order to buy the currency pair. On the other hand, selling the EUR and buying the USD is the only way to sell the currency pair.
It is important to realize when you are selling or buying a currency pair, or more specifically when you are doing a forex transaction, that you will be dealing with the same currency.
Currency valuations on Forex are generally based on US dollars, the world’s largest currency. All currencies are generally quoted in US dollars. As a result of international economic and political unrest, the US dollar has proven to be a safe-haven currency, especially during the Southeast Asian crisis of 1997-1998.
Due to the Bretton Woods Accord, all other currencies were virtually pegged to the US dollar after the Second World War, which led to the US dollar becoming the world’s leading currency. As a result of the introduction of the Euro in 1999, the dollar’s importance was only marginally reduced. The Euro, Japanese Yen, British Pound, and Swiss Franc are also major currencies that exchange against the US dollar.
With its strong international presence derived from members of the European Monetary Union, the Euro is designed to become the premier currency in trading. It is quoted in American terms. However, the currency remains plagued by unequal growth, high unemployment, and government resistance to structural change.
As foreign investors, especially Japanese, liquidated their losing investments in euro-denominated assets in 1999 and 2000, the pair was also weighed. As their need for hedging currency risk in Europe declined, European money managers rebalanced their portfolios and reduced their exposure to the Euro.
The Japanese Yen is the third most traded currency in the world; it has a smaller international presence than the US dollar or the Euro. The Yen is very liquid around the world, practically around the clock. There was a natural desire to trade the Yen mainly among Japanese keiretsu, the economic and financial conglomerates. In contrast to the Japanese stock market, the Nikkei index, and the real estate market, the Yen is a much more sensitive currency.
Until the end of World War II, the Pound was the currency of reference. The currency is heavily traded against the Euro and the US dollar, but has a spotty presence against the other currencies. The Pound benefited from any uncertainty about currency convergence prior to the introduction of the Euro. With the introduction of the Euro, the Bank of England is trying to bring the U.K.’s high interest rates closer to those in the Euro zone.
Providing the U.K. referendum is positive, the Pound could join the Euro in the early 2000’s.
Neither the European Monetary Union nor the G-7 countries have a currency like the Swiss Franc. Although the Swiss economy is relatively small, the Swiss Franc is one of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance. Germany and the Eurozone had a very close economic relationship with Switzerland.
As a result, the Swiss Franc is generally preferred over the Euro in terms of political uncertainty in the East.From a foreign exchange perspective, the Swiss Franc is closely resembled by the Euro, but lacks liquidity. It is generally believed that the Swiss Franc is a stable currency. The Swiss Franc is more volatile than the Euro because demand for it exceeds supply.
Due to their lack of volume and circulation, the Canadian Dollar and the Australian Dollar do not count as major currencies on the Forex market. They can only be traded against the US Dollar.
Due to the prevalence of Spanish dollars in North America during the 18th and early 19th centuries and the standardization of the American dollar, Canada chose the dollar instead of the pound sterling. It was declared by the Province of Canada on January 1, 1858, that all accounts would be kept in dollars as of that date, and that the first official Canadian dollars would be issued at that time.
During the next few years, the colonies that would become Canadian Confederation gradually adopted a decimal system.
As well as replacing the Australian Pound, the Australian Dollar introduced a decimal system on February 14, 1966. As it had been since 1954, the value of the Australian dollar has continued to be managed in accordance with the Bretton Woods gold standard since 1966, when the Australian Dollar was introduced. Despite using the US dollar in practice, the Australian Dollar’s value was primarily determined by gold.
Since 1983, the Australian dollar has been floated, which means that its value is no longer based on the US dollar or other foreign currency. Almost exclusively today, the Australian Dollar’s value is based on domestic measures of value, such as the Consumer Price Index (CPI).
Ex: EUR/USD = Euro/US Dollar
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