Currency of a country is a legally binding money on a given territory, it is enforced by government or other form of social organization. For the convenience we use 3-letter abbreviations of currency names on the markets, every single one has their own. Below is a list of most popular ones with explanation.
The US dollar (USD) is the “reserve currency of the world”. That is to say most central banks in addition to holding their own native currencies as a store of value, also hold dollars making it a universal exchange mechanism for settlement of trade.
Besides USD there are other currencies. The most important for Forex market are:
- EUR – euro, common currency
- JPY – Japanese yen
- GBP – pound sterling
- CHF – Swiss franc
- NZD – New Zealand’s dollar
- AUD – Australian dollar
- CAD – Canadian dollar
Every currency has their own value. It is relative and can change. How to calculate value of some currency? Currency pairs are the answer to this question. It is just a value of one currency showed in the other one. Thanks to that we know how much of quoted currency we have to spend to buy one unit of base currency.
BASE CURRENCY/QUOTED CURRENCY = 1/PAIR PRICE
For example if price of Australian dollar to US dollar is 0.95 it means that 1 AUD we can buy for 0.95 USD and the other way when we sell 1 AUD we get “only” 0.95 USD. If we make this transaction in reality we will sell or buy AUD/USD pair for 0.95, which is 1 AUD for 0.95 USD. Currency pairs on Forex market are generally divided to main pairs with US dollar (majors), cross pairs (crosses), commodities or exotic pairs. Different sources can show different categories. Below you can see logical division but not necessarily the only one correct. It all depends on the criteria used:
- Majors: EUR/USD, GBP/USD, USD/JPY, USD/CHF
- Crosses: EUR/GBP, EUR/JPY, AUD/JPY, GBP/CHF etc.
- Commodities: AUD/USD, NZD/USD, USD/CAD
- Exotic: USD/PLN, USD/ZAR, USD/HKD, USD/SEK etc.
On Screen the currency is quoted in the form of Bid and offer. This two-way prices determines the rate at which the person making the quote will bur or sell one unit of the base currency.
For example: USD/JPY 106.95 – 106.97
This means the dealer will pay 110.20 Yen for a dollar but he will sell one dollar for 110.25 Yen