In finance, the foreign exchange market is the biggest and most liquid financial market, with volumes of over $7.5 trillion daily. There are estimated to be around 180 world currencies that are legal tender globally, according to the United Nations.
However, the number of currencies actually in circulation across the globe is slightly fewer, at around 164. This is because various countries use foreign currencies, or use more than one currency in circulation. Among all the currencies, only a few dominate in the business of trading, acting as a measure of economic strength and stability. These particular currencies facilitate international trade, and are a benchmark of international economic health.
Looking at the top 10 most traded currencies, we can understand why they are so significant, how they affect the world economy and why they are preferred by the world’s traders.
Why do traders prefer to trade certain currencies over others?
There are several factors that go into a preferred currency that enhance profitability, reduce risk and improve overall efficiency when trading.
High liquidity
Major pairs like EUR/USD, USD/JPY are highly liquid, allowing traders to buy or sell large amounts without significantly affecting the price. This ensures tighter spreads, lower transaction cost and minimal slippage.
Economic stability
Currencies from stable economies, like the USD or EUR, experience less volatility overall. Predictability is a key factor when converting currencies, and particularly their reliability in times of economic uncertainty.
Market transparency
Major currencies overall are influenced by economic data and news that is transparent to all. This allows those converting currencies to make informed decisions using fundamental or technical analysis. There is an abundance of market data for larger currency pairs, making them a ‘safe’ option.
Why don’t traders prefer smaller currencies?
The question of preference depends entirely on a trader’s goals, risk tolerance and expertise. Some of the following features are advantages of trading smaller currencies, like higher volatility. This greater price fluctuation can provide more opportunities for larger profits, if a trade is executed effectively.
Adding smaller currencies to a larger portfolio can diversify it, gaining exposure to different economies and reducing reliance on the US dollar, for example. There may also be unique opportunities found in smaller currencies, which may react more strongly to specific global or regional economic events. Minor currency pairs have fewer participants, allowing traders to exploit inefficiencies. Emerging market currencies can allow traders to benefit from long-term growth prospects, like the currency appreciation of a developing economy.
Smaller currencies do have some major disadvantages, however. Lower liquidity can lead to wider bid-ask spreads, and a higher transaction cost. Slippage can lead to difficulty entering and exiting trades at desired prices. A lack of information can make it harder for traders to make informed decisions also, leaving them open to risk of sudden price swings and larger losses.
Top 10 currencies
1. US Dollar (USD)
The most traded currency, involved in about 88% of all forex transactions.
2. Euro (EUR)
The second most traded currency, representing approximately 30% of daily trading volume.
3. Japanese Yen (JPY)
A major reserve currency, accounting for around 17% of global turnover.
4. British Pound Sterling (GBP)
Popular for international trade and finance, with about 13% market share.
5. Australian Dollar (AUD)
Known for its stability and ties to commodity exports, contributing around 6-7%.
6. Canadian Dollar (CAD)
Often influenced by oil prices, it represents about 5-6% of trading volume.
7. Swiss Franc (CHF)
A safe-haven currency with approximately 5% market share.
8. Chinese Yuan Renminbi (CNY)
Increasingly significant in global trade, accounting for about 4-7% of transactions.
9. Hong Kong Dollar (HKD):
A key regional currency in Asia with a smaller but notable share.
10. Singapore Dollar (SGD)
Important in Asian markets, with a growing role in global forex trading.
Why is the US dollar the most traded currency?
There are several key reasons why the US dollar is the most traded currency worldwide. First, the US possesses the largest economy in the world, accounting for around 26% of the total world GDP. It enjoys a robust and stable economic system, coupled with good institutions and laws. The dollar is rated to be reliable as an investment vehicle and refuge in times of economic crisis. It is also the global reserve currency, which banks and financial institutions hold across the globe.
Almost 60% of global foreign exchange reserves are made up of US dollars, thanks to historical agreements like Bretton Woods. 54% of global trade uses the dollar, extending even to transactions which do not involve US companies. Furthermore, oil and gold are priced in dollars, further solidifying their role in international commodity trade. The US financial markets are some of the largest, most liquid and most accessible globally, allowing foreign investors to purchase US assets like treasury bonds – commonly regarded as ‘safe’ investments.
As the use of the dollar became more widespread over time, it helped to create a self-reinforcing cycle, one that makes it seem like there is no alternative. The difficulty of switching to a different dominant currency helps the US dollar maintain an inertia. Combined with the US’s military and geopolitical powers, the US Federal Reserve provides liquidity to other central banks through swap lines during financial crises, ensuring global confidence in the dollar’s availability and stability.
Conclusion
The global forex market is a vast and ever-changing landscape. As we have explored, the market is primarily driven by a handful of currencies that dominate the space, playing a crucial role in international trade and finance. These top 10 currencies reflect the economic strength of their nations. For traders, these currencies stand out with their deep liquidity and stability, offering lower risk.
While smaller currencies might offer them unique opportunities, it is the top 10 currencies here that dominate the forex market with the highest trading volumes. The US dollar remains the leader due to its role as the global reserve currency. These currencies will continue to shape international markets and influence economic policy, and will be important to keep watch over in the following years.
As always, for currency news and insight into the world of currency, make sure to stay up to date with our Expert Analysis, as well as our daily Market Commentary.
Caleb Hinton
Caleb is a writer specialising in financial copy. He has a background in copywriting, banking, digital wallets, and SEO – and enjoys writing in his spare time too, as well as language learning, chess and investing.
