The vast majority of trades in the Forex market that occur in the United States take place in currencies that involve the U.S. dollar — around 80% in fact. This is because the U.S. dollar is the reserve currency of the world. Most of the agricultural items that are traded in the United States are traded in U.S. dollars. This includes things like oil and farm products.
Any country that needs to purchase oil will first need to convert its currency into U.S. dollars. China, Japan, and Australia are major importers of oil, and that is why all of those countries keep major reserves of the U.S. dollar available within their borders that they can use as necessary. China holds over $3 trillion in U.S. dollars. Japan and Switzerland keep a total of $1 trillion on the books to make the purchases that they need to.
No matter how you look at it, there are a lot of countries that are keeping a significant amount of U.S. dollars in reserve so that they can be prepared for the possibility of needing to purchase more oil using the dollar. After all, certain countries will need to import a lot more oil than they export, and that means paying the price for it.
A lot of the speculation that occurs in the Forex market revolves around the idea of if the U.S. dollar is strong or not on a particular day. Traders should look at the most liquid currency pairs in order to profit from the strategies that they put together.
Some of the major pairs include the following:
- GBP/USD
- EUR/USD
- USD/CHF
- USD/JPY
These are the currency pairs that traders will first look at when they are trying to figure out what they need to do as far as trading the dollar. They are the most liquid and the most traded.
Then there are the commodity pairs:
- AUD/USD
- USD/CAD
- NZD/USD
All of these pairs are tied to the USD in some way, and it is a big reason why traders speculate on these pairs in particular. On any of the pairs that you select, you can take a pro-USD or anti-USD approach depending on your view of how the U.S. dollar is going to trade. It is a lot less complicated than the stock market where traders have thousands of companies to select from to potentially invest in.
Cross Currency Trades Offer More Options
There are other options outside of the U.S. dollar that you can potentially use when you are looking to try to trade something that is not bound by the U.S. dollar. This is to say that there are choices that one can make to trade currency pairs that do not involve the U.S. dollar at all. When one does this, they are attempting to trade two non-USD related currencies against one another to find the most profitable type of trade that they possibly can.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.
