Forex currencies are influenced by a number of macroeconomic conditions specific to each country of origin, as well as the global market situation. Economic indicators (GDP growth, import / export), social factors (unemployment, housing market conditions), and central bank policies are the factors that determine the value of currency in the foreign exchange market.
The six most important forex have their intrinsic characteristics:
US dollar (USD)
The US dollar is the most widely traded currency in the foreign exchange market and makes up about 86% of all the forex market. It is also used to value other currencies and commodities.
The dollar dominates the foreign exchange reserves of all countries – it represents about 64% of the world reserves. Overall, there are several fundamental principles that affect the US dollar. Since oil and most metals are traded at prices denominated in USD, fluctuations in supply and demand in these markets have an immediate impact on the value of the currency, as did the 2008 oil price collapsing to hit EUR / USD 1 60.
The dollar is also benefiting from its safe haven status as investors move towards the dollar as the economy deteriorates.
The Federal Reserve interest rate has a huge impact on the currency. The Fed’s policy rate decisions are influenced by inflation, employment and GDP, so the dollar is also influenced by these factors.
Other important drivers for the USD are the US trade balance and national debt. Typically, a rise in the trade deficit and rise in national debt make the US currency less attractive. However, sometimes the opposite can happen when the trade deficit and debt are high. Investors are sometimes looking for perceived security in the dollar which is why familiarizing yourself with the platform could help.
The euro is by far the most up-to-date currency in the foreign exchange markets. It replaced the German D-Mark, which made up 25% of forex transactions before the creation of the euro. The euro is used by the 19 member states of the European Union and is the second most traded currency with around 37% of foreign exchange turnover.
The fundamental factors influencing the price of the euro are often based on strong economies that use this common currency, such as France and Germany in particular. The main drivers of the euro’s performance are consumer price inflation and the interest rate set by the European Central Bank. The indicators for country exports and the unemployment rate also tend to have an impact on the development of the common currency, as countries like Germany are important exporters of industrial goods and technology. Europe remains dependent on energy for Russian gas and oil from the Middle East, higher demands on these products have a negative effect on the European currency.
Another problem with the euro is the difference between its economies, which was made clear by the 2011 debt crisis. When problems arise, EU leaders struggle to find solutions that benefit the EU in both large and small economies. Until the sovereign debt crisis, the euro was seen as an alternative reserve currency to the USD. Unfortunately, problems with the EU’s peripheral countries have undermined confidence in the euro.
Japanese yen (JPY)
The Japanese yen is the strongest and by far the most traded currency in the Asian market. The yen is the third most widely traded currency, mainly traded against the dollar and the euro, it represents 20% of world trade. Japanese yen demand comes mainly from Japanese companies repatriating their commercial profits. The yen is therefore sensitive to the profitability of these companies and the real estate market.
The Japanese economy is mainly focused on industrial exports. The JPY is valued by traders as a safe currency during times when risk aversion hits the markets, but the currency is also used by carry traders when risk appetite arises. Because of the low interest rates in Japan, these operators can borrow money at low cost to invest in other countries.
Japan’s proximity and tensions with China sometimes have a significant impact on the yen. The problems of the JPY are the constant devaluation of the currency and the intervention of the country’s central bank. The Bank of Japan is concerned about excessive appreciation of the yen (the Japanese currency is currently trending to appreciate a lot due to economic uncertainty) which could damage the country’s exports and economy as Japan is constantly trying to weaken its currency. Deflation hit Japan in the early 1990s, after the housing bubble burst in 1980, it remains one of the greatest threats to Japan’s future.
With the growing number of older people compared to young people and growing fears about the future, it is difficult for the government to deal with deflation.
British Pound (GBP)
The British pound is the national currency of the United Kingdom. GBP is the most traded currency against the USD and EUR and the fourth at world level with 17% of trading. 34% of forex deals pass through the City of London, the main financial center of the forex market.
The fundamental factors affecting the pound are as complex and varied as the UK economy itself and its influence in the world. London can still be viewed as global finance capital, its commodities market also playing a fundamental role in the development of the GBP. Inflation and GDP have a major impact on the pound, but the housing market is also important for the British currency.
Forex traders sometimes use the pound as an alternative to the euro at a time when European Union problems are getting too serious. The GBP also tends to be influenced by political events, usually the currency reacts negatively to the uncertainty of events like elections.
Swiss Francs (CHF)
Switzerland is a small country in the European Alps, and yet its strong trading and inflow of money, the Swiss Franc, are one of the main currencies traded on Forex.
The CHF is another popular currency in times of risk aversion, Switzerland’s economy and huge gold reserves (seventh largest reserve in the world, despite the small size of Switzerland) are the added credibility of the currency.
As with the JPY, the CHF is suffering from central bank intervention. On September 6, 2011, the Swiss National Bank even went so far as to anchor the franc against the euro, which resulted in constant downward pressure on the currency.
The CHF is perceived as a safe haven. Its economy is stable but does not justify its place among the major currencies. Thanks to the good reputation of their banking system, investors can protect their assets by buying CHF. The Swiss franc tends to be more volatile than other major currencies due to its lack of liquidity.
Canadian dollar (CAD)
The Canadian dollar is known as the “commodity currency” because the Canadian economy is export-oriented. Most of Canada’s exports are to the United States, Canada’s economy and currency depend on the neighboring country. The main export product is crude oil, the Canadian dollar and therefore influenced by crude oil prices.
Global economic growth and the raw material lead make CAD attractive to investors. On the other hand, the problems of the world economy and the national economy can harm the DAC.