Fact checked by Suzanne Kvilhaug
Currencies that Dominate the Forex
The foreign currency exchange market, or forex, is the world’s largest and most liquid market, with more than $838 billion in currencies expected to be traded in 2025. Although there are 161 currencies in circulation around the globe, forex trading is largely focused on just six currencies: the U.S. dollar, the euro, the British pound, the Japanese yen, the Australian dollar, and the Canadian dollar.
There are reasons why each of these currencies has a vital role in the global foreign exchange market.
Key Takeaways
- The U.S. dollar is the dominant currency in forex markets.
- Other actively traded currencies include the euro, Japanese yen, Australian dollar, Canadian dollar, and British pound.
- The Japanese yen is the most active of the Asian currencies, due partly to its role as a surrogate for the economies of several Asian nations.
1. The U.S. Dollar
The U.S. dollar, sometimes called the greenback, is easily the most traded currency on the planet. The U.S. dollar is traded in a currency pair with all of the other major currencies and often acts as the intermediary in triangular currency transactions.
The primary reason is that the greenback acts as the unofficial global reserve currency, held by nearly every central bank and institutional investment entity in the world.
In addition to its global acceptance for transactions, the U.S. dollar is used by other countries as an official currency in lieu of a local currency, a practice known as dollarization. In other countries, it is widely accepted as an alternative to the official local currency.
The U.S. dollar is also an important factor in the foreign exchange rate market for other currencies, as it acts as a benchmark or target value for countries that choose to fix or peg their currencies. Quite often, countries will fix their currencies to the U.S. dollar to stabilize their exchange rates rather than allowing the forex to drive the currency’s relative value.
The U.S. dollar also is used as the standard currency for most commodities, such as crude oil and precious metals. Thus, these commodities are subject not only to fluctuations in value due to the basic economic principles of supply and demand but also to the relative value of the U.S. dollar.
2. The Euro
The euro has become the second most traded currency behind the U.S. dollar. The official currency of the majority of the nations within the eurozone, the euro was introduced to the world markets on Jan. 1, 1999, with banknotes and coinage entering circulation three years later.
Along with being the official currency for most eurozone countries, many nations within Europe and Africa peg their currencies to the euro, for much the same reason that currencies are pegged to the U.S. dollar—to stabilize the exchange rate. As a result, the euro is the world’s second-largest reserve currency.
With the euro being a widely used and trusted currency, it is prevalent in the forex market and adds liquidity to any currency pair it trades with.
The euro is commonly traded by speculators as a play on the general health of the eurozone and its member nations. Political events within the eurozone can also lead to large trading volumes in the euro.
The euro may well be the most politicized currency actively traded in the forex market.
Note
The U.S. dollar is the dominant currency in foreign exchange markets. Measured by volume, the eight most common currency pairings all involve the U.S. dollar.
3. The Japanese Yen
The Japanese yen is the most widely traded of Asian currencies and is viewed by many as a proxy for the underlying strength of Japan’s manufacturing and export-driven economy. As Japan’s economy goes, so goes the yen (in some respects).
Forex traders also watch the yen to gauge the overall health of the Pan-Pacific region, taking economies such as South Korea, Singapore, and Thailand into consideration, as those currencies are traded far less in the global forex markets.
The yen is also well known in forex circles for its role in the carry trade, which seeks to profit from the difference in interest rates between two currencies. The strategy involves borrowing the yen at next to no cost (due to its low interest rates) and using the borrowed money to invest in other higher-yielding currencies around the world to pocket the rate differentials.
With the carry trade being such a large part of the yen’s presence on the international stage, the constant borrowing of the Japanese currency has made its appreciation a difficult task. Though the yen still trades with the same fundamentals as any other currency, its relationship to international interest rates, especially with the more heavily traded currencies such as the U.S. dollar and the euro, is a major determinant of the yen’s value.
4. The British Pound
The British pound, also known as the pound sterling, is the fourth most traded currency in the forex market. Although the U.K. was an official member of the European Union, the country never adopted the euro as its official currency for a variety of reasons, namely historic pride in the pound and a desire to maintain control of domestic interest rates.
As a result, the pound is sometimes viewed as pure play on the United Kingdom. That is, forex traders will judge the value of the British pound based on the overall strength of the British economy and the political stability of its government.
Due to its high value relative to its peers, the pound is an important currency benchmark for many nations.
The British pound also acts as a large reserve currency due to its historically high relative value compared to other global currencies.
Important
Being located close to the world’s largest consumer base—the United States—the Canadian economy and the Canadian dollar are highly correlated to the U.S. economy and movements in the U.S. dollar.
5. The Australian Dollar
Also known as the Aussie, the Australian dollar is one of the major currencies of the Asia-Pacific region. The Aussie is considered one of the foremost commodity currencies, meaning that its value can be affected by price shifts in Australia’s major exports like coal, petroleum, and iron ore.
The AUD-USD trading pair now accounts for 6.37% of global forex volume, beating the dollar pairings for both the Swiss Franc and the Canadian Dollar.
6. The Canadian Dollar
The Canadian dollar, nicknamed the loonie, is also a commodity currency, meaning that it often moves in step with the commodities markets—notably crude oil, precious metals, and minerals.
With Canada being a major exporter of those commodities, the loonie often reacts to movements in underlying commodities prices, especially that of crude oil.
Traders often trade the Canadian dollar to speculate on the movements of commodities or to hedge positions in the commodities market.
How Can I Trade on the Forex?
Trading on the forex is dominated by institutional traders and speculators dealing in huge volumes and at split-second speeds. Nevertheless, the internet has opened the door to trading by anyone with an account. Both the major online brokerages and specialized foreign exchange sites offer access.
First, a deep dive into the ABCs of forex trading is essential.
What Is a Forex Pair?
You can’t buy currency. You can only trade for it using another currency. Every foreign exchange is a swap between one currency and another currency. For example, EUR/USD is a currency pair for trading the euro against the U.S. dollar. When one or both currencies change in value, one trader’s stake is worth more and the other trader’s stake is worth less.
Where Is the Forex Located?
The forex has no physical existence. It is, and always has been, a purely electronic marketplace.
The Bottom Line
Understanding the factors that move each major currency is a pivotal step in becoming a savvy participant in the forex market. The U.S. dollar, the euro, the yen, the British pound, the loonie, and the Swiss franc are currencies to watch.