Currencies and Currency Pairs

There are hundreds of currencies out there and we do not keep an eye on each and every one of them. The key currencies are the US Dollar used in the US, the Euro in the Eurozone, the Pound in the United Kingdom, and the Yen in Japan.

Overall the norm is for each country to have its own currency but there are cases where a number of countries form an alliance adopting a common currency like the Eurozone. At this point it should be noted that there are countries that are in the European Union yet are not included in the Eurozone, hence they maintain their own currency. Also a case worth mentioning would the pegging of a country’s currency to another currency. For example a number of Caribbean and central American countries have stable, fixed exchange rates to the US Dollar, while other countries may have pegged the value of their currencies to the Euro.

Traders should be well acquainted with the relative abbreviations as determined by the International Organisation for Standardization as they are extensively used by market participants. It should be noted that the abbreviations used are mentioned in the ISO 4217 which is a standard and defines alpha codes and numeric codes for the representation of currencies and provides information about the relationships between individual currencies and their minor units. At the same time currencies have also symbols which could help an individual to distinguish between them. A list including some of the main ones could include the USD for the US dollar, EUR for the Euro, GBP for the UK pound, AUD for the Australian Dollar, CAD for the Canadian dollar and CHF for the Swiss Franc. There is an unique abbreviation for every currency yet we would like to quote some of the most well known and most traded in the table below

So how are currencies traded?

The idea is more or less the same as buying stocks. If you think the company is doing well, you buy shares in the company with the expectation that the share price will increase in value. In FX, instead of buying shares of companies, you buy “shares” of countries with the same logic, i.e. currencies. If you believe that the economy of a specific country is doing well, you expect its currency to appreciate so you buy the currency.

And that brings us to the dual nature of money which we will discuss in the next video.