Will the dollar get pounded?

All You Need To Know About Currency Pairs

Currency pairs basically compare the value of two currencies against each other. Highly useful for knowing roughly how many pints of beer €50 will get you on your vacation.

Whoever said “all things are relative” was right on the money. This is especially true of currencies. Is the US dollar worth a lot, or not? Well, it’s easier to determine the value when you stack it up against other currencies.

With exchange rates, you know how much of one currency you can get for selling another. Currency pairs are the foundation of the foreign exchange market, known as forex, the largest financial market in the world.

How do they work?

Let’s imagine that the EUR/USD = $1.092. The base currency would be the euro and the quote currency is the US dollar. The currency pair indicates that you would need US $1.092 to buy €1.

If you trade with this pair and you “go long”, it means you will be buying euros and selling dollars. If you “go short”, you would be doing the direct opposite. For instance, if you think the euro is only going to get stronger, you would go long.

Most famous couples (also known as the “majors”)

EUR/USD – Call the “euro dollar” the power couple of the currency world. After all, they’re the currencies of the two largest economies on the planet. This popular pair sees the largest volume of transactions. (Almost 70% in the forex market!) But forex newbies beware – like most celebrity couples, this pair can also be volatile and unpredictable.

GBP/USD – Called the “cable” because the exchange rate was transmitted via a submarine cable in the mid-19th century. The name’s stuck ever since. The relative strength of these two superpowers’ economies greatly influences this pair. It’s sensitive to UK economic data or interest rate decisions by the Bank of England. Cable can have abrupt, sharp price movements which will appeal to those who like a quickie (when it comes to trading, that is).

USD/JPY – The “gopher” can be highly volatile – which can increase both your profit potential and your risk. So if you’re a noob, just keep this in mind before you “gopher” it. Japan relies heavily on exports so its trade balance will affect exchange rates. For instance, more imports than exports could pressure the yen against the dollar. The pair can also be swayed by the Bank of Japan’s customary meddling and Asian market forces.

USD/CHF – The “dollar swissy” is not the latest burger promotion but a pairing of the US dollar and the Swiss franc. Thanks to the stability of the Swiss economy, this currency pair is rock steady. The franc is also considered a “safe haven” currency which means investors park their money in it during turbulent times. Just like how Switzerland managed to stay out of two world wars – the franc typically rises even as global markets are in a sh*tstorm.

Cross-currency pairs (also known as “minors”)

Pairs that don’t involve the US dollar are known as cross-currency pairs or simply as “crosses.” For instance, a pair containing the euro is called a euro cross.

AUD/JPY – You know the saying “opposites attract”? Well, that goes for the “Aussie Yen” which pairs the Australian dollar with the Japanese yen. The difference in interest rates between the two countries is the highest among all the major currencies. So some forex traders favour the dynamic duo as a ‘carry trade’ which means they can simply make money on the interest rate differentials. Beware though, this pair can also be pretty volatile.

CAD/JPY – The “Loonie Yen” is anything but crazy. Comprising of the Canadian dollar and the Japanese yen, this pair is influenced by oil prices – but for different reasons. Canada is one of the world’s largest oil producers while Japan is a huge importer of oil. While this pair doesn’t always follow oil prices, it’s worth knowing the correlation!

AUD/CAD – The “Aussie Loonie” is a pairing of the currencies of two former British colonies: Australia and Canada. They’re hugely dependent on commodity markets since both economies rely on exports of raw materials. So when it comes to the AUD, you should watch how gold is moving. As for the CAD, keep an eye on the price of black gold (crude oil, that is).

Exotic pairs

No, we’re not talking about a couple of tropical parakeets. Instead, this refers to a currency pair that is less commonly traded in the forex market. (So not the best place to start if you’re a forex noob.) Exotic pairs are made up of a major currency and the currency of an emerging or smaller – but strong – economy.

EUR/SEK – The “Euro Stokkie” has nothing to do with the Eurovision Song Contest. It’s actually a pairing of the euro and the Swedish krona. While Sweden managed to dodge the adoption of the euro, its fortunes are closely tied to its Scandinavian neighbours. So worth keeping this in mind when evaluating the performance of this pair.

AUD/NZD – The “Aussie Kiwi” pairs the currencies of two countries down under: Australia and New Zealand. They have many similarities – and not just because they both boast postcard-perfect scenery with exotic animals like the flightless kiwi (hence the nickname for the NZD). Their economies are closely linked as key trading partners.

How to start trading currency pairs

Download BUX today and take a crack at currency trading. In our app, you can also trade other currency pairs like AUD/USD or NZD/USD. More importantly, you can try it out for free first without putting in any money. BUX also offers leverage – find out how to use leverage in currency trading.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77.7% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.