In currency trading there are distinguished currencies that are considered more liquid and those which traders think do not have high liquidity. But how can you decide which currency is liquid and which is not?
For understanding this you should know that currencies of economically and politically steady countries are more liquid and in higher demand than currencies based in less stable areas. For instance let’s take U.S. dollar.
Due to the size and strength of the United States economy, the American dollar is considered the most actively traded currency, and in currency pairs it is usually taken as the base currency for quotes.
As a result of its importance in foreign exchange market U.S. dollar serves as a differentiating feature for currency pairs. Those currencies that exclude U.S. dollar are referred as cross currency pairs.
Besides U.S. dollar there are other currencies too which are liquid and are widely traded. Those currencies are called major currencies. The list below will help you to recognize the major currencies:
- the U.S. dollar (USD)
- the Euro (EUR)
- the New Zealand dollar (NZD)
- the Canadian dollar (CAD)
- the Swiss franc (CHF)
- the British pound (GBP)
- the Japanese Yen (JPY)
- the Australian dollar (AUD).
Another important thing for you to know is that when the U.S. dollar is the base currency and a currency quote increases, this indicates that the dollar has risen in value and the other currency has weakened.
However there are three exceptions to this rule. Those are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these currency pairs, where the U.S. dollar does not act as a base currency, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar. In other words together with the increase of currency quote the value of the base currency increases. In the same way lower quote indicates that the base currency is weakening.