Major Currency Pairs and The Rise of Digital Currencies

Currency trading has been around for centuries. However, the rise of digital currencies has brought new opportunities and challenges to the market. Understanding the differences between major, minor, and exotic currency pairs is essential if you want to invest in this space.

What is a Currency Pair?

A currency pair is a term used by foreign exchange (forex) traders. It describes the relationship between two currencies and how you can trade them against each other. In a currency pair, the first currency is the base currency. The second currency is the quote currency or counter currency. The value of the base currency is always expressed in relation to the quote currency.

For example, EUR/USD is, by volume, the most popular currency pair. In this trade, the euro is the base currency, and the US dollar is the quote currency. If the current exchange rate is 1.2000, this means that one euro is equal to 1.2000 US dollars.

Traders buy and sell currency pairs on the forex markets. They do so based on how they expect the value of the base currency to change relative to the quoted currency. 

The main causes of fluctuations in the exchange rates of currency pairs are: 

• Economic data
• Geopolitical events
• Central bank policies

Currency pairs are a fundamental concept in the world of trading. However, with the rise of cryptocurrency, traditional currency pairs have had to adapt to include these new digital assets. 

Cryptocurrency pairs represent the relative value between a cryptocurrency and a fiat currency, such as USD or EUR. For example, BTC/USD represents the value of Bitcoin in United States dollars. 

In the last five years, cryptocurrencies have become more mainstream. We’re starting to see the inclusion of crypto-currency pairs in trading platforms become more common. Traders can now speculate on the price movements of cryptocurrencies against traditional currencies. These new cross-currency pairs deliver new investing opportunities and trading strategies.

What are the Major World Currencies?

The foreign exchange markets define what the world’s major currencies are by the height and frequency of their trading volume.

The higher and more frequent the trade, the more major the currency. As you’d expect, the major currencies belong to the world’s largest economies. The most actively traded currencies also benefit from high liquidity in the market.

The US dollar has the highest trading volume of all currencies and is either the base or quote currency in 88.5% of all foreign exchange transactions. 

In 2022, the Euro and Japanese Yen ranked behind the dollar in their foreign transaction volume. They contributed 30.5% (EUR) and 16.7% (JPY) of Forex transactions, respectively.

The foreign exchange market indicated the world’s major currencies are the:

• US dollar (USD)
• Euro (EUR)
• British Pound (GBP)
• Japanese Yen (JPY)
• Swiss Franc (CHF) 
• Canadian Dollar (CAD) 
• Australian and New Zealand Dollar (AUD), (NZD)

What are Major Currency Pairs?

While there are at least eight major currencies in the world, there are only seven major currency pairings on the foreign exchange market. 

This is because a major currency pairing must involve the dollar as the base, or counter currency, in the trade. Of course, you cannot trade pair the USD with itself (USD/USD). 

There is debate among traders about what constitutes a major currency pair. The concept of major can incorporate an economic point of view (like trading volumes) and a speculative viewpoint.

The major currency pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, and NZD/USD. You can see these major forex pairs in the chart below.

As it currently stands, the major pairs are displayed on the table below:

What are Minors and Exotics?

All forex major pairs include the US dollar. If you pair one major trading currency against another and neither are US dollars, this is a “minor trading pair.” An example of this would be a pair between then Swiss Franc and the Euro.

You can see other examples of popular forex minor currency pairs in the table below: 

An exotic currency pair is a term used to describe the trading of a developing economy’s currency with a major currency. The developing economy’s currency can either be the base or the quote in the trade.

When dealing with exotic currencies, traders should exercise diligence. Ideally, they should have experience in the field and be able to account for destabilising factors that affect currency value. 

In the case of exotic currencies, these factors can often be the political or economic agenda of the country. They can increase volatility and trigger extreme movements or wild swings within the exotic trading pairs.

Why is the US Dollar so important?

The Bretton Woods Agreement of 1944 explains the prevalence of the US dollar in the foreign exchange market.

The intention behind the agreement was to create an efficient foreign exchange system. That system should, first, promote economic growth on an international scale. Second, it should encourage competition to safeguard against the extreme devaluation of currencies. 

The Bretton Woods system fell in 1971. Despite that, the value of the US dollar continues to prevail. 

Countries agreed to continue to peg their currencies to the fluctuating value of the dollar. However, at the time of the system, the currency valuation of the US dollar had a basis in allocated gold due to the abundant stores of American reserves. Eventually, this was no longer the case. 

In 1971, the volume of US gold was insufficient to cover the number of dollars in circulation. At that point, President Nixon devalued the USD when he suspended the ability of citizens to convert their dollars into gold. 

Gold was now out of the currency trading equation. This meant that countries that were part of the agreement had more autonomy over their currency exchange agreements. This led to the currencies being free-floating.

The Future of Currency

In 2021, El Salvador shook up the financial market by making Bitcoin legal tender. Emerging market economy (EME) currencies, like all fiat currencies, are at risk of the depleting effect of inflation. The country, understandably, wanted to protect itself against this with cryptocurrencies.

Many have opposed the introduction of Bitcoin due to fears surrounding its instability. This appeared justified when on the day Bitcoin became legal tender, it dropped in value by 20%.

El Salvador is just one example of a country adopting alternatives to fiat currency.

There are also active attempts by countries whose relations with the U.S. feature a pointed tension, to “dedollarise”, which means trading with each other in their own currencies instead of having to hoard dollars to trade internationally. This may cause further dollar instability.

Both fiat and digital currencies are unstable with an entirely unbacked, digital currency being much more unstable. This leads to a question of whether emerging markets should use Bitcoin and other cryptocurrencies as means of exchange. 

After all, since 2021, the price of Bitcoin (BTC) has demonstrated inherent volatility. More recently, in April 2023, optimism and liquidation of short positions pushed up the value past $30,000. This is the first time this has happened since June 2022. 

Many argue that using gold as currency again is the solution for EMEs seeking economic stability and prosperity. This has led digital asset advocates to speculate on the consequences of digitalising gold on the blockchain. The question is: can peer-to-peer blockchain make ownership and utility of gold more accessible to entire nations?

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This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.