Dollar in General - Rich Clifford, fractalerts

Dollar in General

Why currency pairings aren’t always USD first…

Dollar in General

Why currency pairings aren’t always USD first…

Written by  fractalerts

Here’s an interesting fact for you; 89% of the currency trades around the world involve the US dollar. As the leading currency in a number of world markets, and as the premier currency trading unit, it is interesting to note it isn’t always the first in a forex pairing.
The GBPUSD and the EURUSD are two of the pairings that we provide alerts on, and ones which put the world’s most popular currency in second place. There is a simple reason for this, but before we get to it let’s just be a little clearer about what you are looking at when you see a currency pairing.

Rich Clifford, fractalerts

So which way is it going to go from here? Well, that all depends on one thing – the Federal Reserve and whether or not they will raise interest rates in 2016.

Direct and Indirectly Speaking…

Currency pairs can be separated into two different types. These are direct and indirect quotes. In a direct quote the domestic currency (the one of the country you are in) is the base currency, and the foreign currency is the quote currency. You, in simple terms and for example, want to know how many Japanese Yen your home currency will buy you, so you can get as many manga comic books on your nearing trip to Toyko. In this example the USD is your base currency, and the JPY is your quote currency.

An indirect quote is the opposite. The foreign currency is the base currency and the domestic currency is the quote currency. For example, an American trader looking at the EURUSD pairing is also looking at an indirect quote. Their quote of 0.90 EURUSD means a cost of €0.90 to purchase $1.

 

But What If Neither Are My Own Currency?!

The Forex markets allow traders to make trades and investments on an array of currency pairings. As these trades are happening around the world, the base and quote currencies have, for ease, become standardized.

Even though most of the trades in the world involve the USD, quoting the AUDUSD, EURUSD and GBPUSD as indirect quotes is simply because of convention and trading dominance. The GBP was the world’s go to currency once (don’t mention Brexit or the war…).
Although there have been countries which have left, the retention of a few weeny Pacific islands means that the sun still does not set on the British Empire. When the currency pairings were being decided, the GBP was still significantly stronger and more widespread than the dollar, which only become the world’s de facto reserve currency after World War II, hence GBPUSD.

The introduction of the Euro in January 1999 involved 11 countries opting in to use one single currency. It was deemed, in this instance, that 11 countries and independent economies outweighed that of the United States. That is why the Euro was first floated as the EURUSD, and remains this way now.

But regardless of the way the pairing sits basic calculation can mean that the base and quote currency can be interchanged.

 

So What Do You Trade?

At fractalerts you will be able to find alerts for six currency pairings. We offer the AUDUSD, EURUSD, GBPUSD, USDCAD, and USDJPY. These, with the addition of the EURGBP, are the most popular and heavily traded forex pairings. And the forex market alone is huge, with trading volumes of over $5billion a year…

So if you want more information about our alerts which can help you navigate not only the Forex but also eight other investment areas, head to fractalerts now.

 

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