With the foreign exchange being the biggest and most liquid market in the world, it’s interesting to look at the major currencies and their share on the global currency market.
Many people think equity markets are the biggest markets but, there’s no other market like the foreign exchange for volume and liquidity. While equities are mainly traded by retail investors, funds, and institutional investors; the foreign exchange involves trading by financial institutions, non-financial institutions, retail traders and heavy-weights like central banks and governments. All take part in a market that trades $5 trillion per day on average.
A question that is often asked is: Which currencies are traded the most?
To answer that, let’s take a look at official data from the Bank of International Settlements (BIS), available on its Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market, last issued in December 2016. In a few months we will have an update, but don’t expect much change in terms of the biggest currencies. So, here is the table:
As expected, the US Dollar (USD) is the biggest player in foreign exchange. With the US being the largest and most important economy in the world, its currency assumes a key role in global trade, as a reserve currency and as a global unit of account. Not only a significant part of global trades are made in US Dollars, but also many commodities are priced in this currency. Many central banks and other institutions use the US Dollar as a reserve currency too. All these facts elevate the dollar towards the top spot, as the most important currency, with a share of 43.8% of the foreign exchange market and almost triple the share of the next currency in the queue – the Euro.
The Euro has only 20 years of history but established itself as the second most important currency. After all, there are 19 European countries adopting it for their day-to-day activities and many other countries making business with Europe are replacing the Dollar with the Euro. The ECB initially adopted a hard nose stance very similar to that of the German Bundesbank, which helped create a strong Euro. Whether that’s still the case or not is certainly arguable but, nevertheless, the Euro is a reference currency.
Next in the queue is the Japanese Yen and only after it comes the Great Britain Pound. Many believe the Pound to be bigger than it is, because of the importance and highness attributed to the City. In fact, the City is the most important financial centre in the world for foreign exchange. London is where most currency deals occur. But most of them aren’t really set in Sterling. Thus, while the pound has a share of 6.4% of the market, the UK has a share of 36.9% of it.
Apart from the USD, EUR, JPY and GBP all other currencies represent a small part of the market. The Australian Dollar and the Canadian Dollar come next in the queue. They have their own importance as both Australia and Canada rely heavily on commodities and natural resources, such that their currencies are many times tied with developments in commodities markets. To some extent the Canadian Dollar and the Australian Dollar are bellwethers for commodities.
The Swiss Franc comes from a country with a reputation for delivering financial services and banking secrecy, for keeping its monetary policy tight and sound and for keeping low levels of debt. All this turns the Swiss Franc into a safe-heaven currency. At volatile times, demand for Swiss Franc rises. That’s the same for the Japanese Yen. All foreign exchange traders should be very careful about this point. Most trading in foreign exchange uses high levels of leverage, which means that a small change in a currency may lead to high profits or losses. When in 2015, the Swiss National Bank decided to scrap the peg to the Euro, the exchange rate between EUR/CHF went down from 1.20 to 0.86 during the same day.
Next in the list is the Chinese Yuan (Chinese Renminbi). Even though China occupies a top spot in global trade, its currency lags behind because it has not always been floating freely.
The Swedish Krona and the New Zealand Dollar close the top 10. The Mexican Peso is the next in the list with a share of 1% of the currency market. All other currencies in the list represent less than 1% of the market. The BRICS are all in the list: Brazilian Real (19th), Russian Ruble (17th), Indian Rupee (18th), Chinese Yuan (8th), and South Africa Rand (20th).