Reserve Currencies

Date: 2015-10-07; view: 455.

Major Currencies and Currency Types

There are a lot of nations in the world and consequently a large number of currencies to choose from when trading. The currencies of Brazil, Russia, China, the Eurozone, Turkey, Japan, South Africa and Canada are popular with large and small traders, for different reasons. What the market values most in a trade can change depending on government policies and the global economic environment. For example, during the flowery days of the carry trade, many traders would simply long (buy) the currency offering the highest interest rate, and short (sell) the one offering the lowest interest rate, with little consideration given to the underlying economic soundness. Such a strategy is less likely to be profitable in today's chaotic environment with interest rates racing lower across the globe, and fundamental economic strength is once again the major concern in deciding on currency allocations.

In order to simplify the matter, let us group the currencies into four types and examine each of them briefly:

There's really only one true reserve currency in the world with dominance of about two-thirds of central bank accounts, and it is the US dollar, the currency of international trade. But there are also others, such as the Swiss Franc, Japanese Yen and to a greater extent, the Euro, which play the same role, and as such are of higher quality and offer greater safety in times of trouble.