Currencies

As forex traders we are here to trade currencies.  Currencies are grouped into Major Currencies and Minor Currencies.  It really is a function of the size and stability of the economy behind the currency that defines if it is a Major currency or not.

Major Currencies Major Pairs
EUR - Euro
USD - US Dollar
JPY - Japanese Yen
GBP - Great Britan Pound Sterling
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
AUD/USD
EUR/USD
GBP/USD
NZD/USD
USD/CAD
USD/CHF
USD/JPY

During a Forex trade you will see these currencies quoted in pairs.   Sometimes this can be confusing for new traders.   An easy way to look at this is going to the grocery store to buy an apple.   You go there with the intention to trade money for apples.  If the current price for an apple is 50 cents then you would see the price quoted as $.50 next to the apple.   A forex trader would read the price of   Apple/USD  as  .50    The pair you are quoted, Apple/USD, will have price changes as supply and demand dictate.

When supply and demand cause the value of the Apple to go up it will take more dollars to buy the apple so the the Apple/USD pair price will go up.  You will see the price of Apple/USD to rise to .60 or .70.   By the same factors the value of the apple can go down when the supply is increased.   In this case the Apple/USD will go down in price to .40 or .30. 

What happens if the value of the apple remains the same but inflation causes the dollar to get stronger?  The apple farmer would then be happy to accept less paper dollars for his apple because they are worth more.   The price might drop to .40 per apple.   The price quoted for Apple/USD = .40.   If the dollar gets weaker then the apple farmer will want more dollars for each apple he sells.   The price for Apple/USD might go up to .60 or .70.      In this pair combination as the USD gets stronger the price goes down.  As the USD gets weaker the price will go up.

In the real world factors are affecting both sides of the price equation.   If you live in the United States you may have dollars in your pocket but you want to participate in the Japense and the Euro market conditions because the USD is not changing.  You would look to the pair  EUR/JPY quoted recently at 106.00.   This say it will take 106 Yen to purchase 1 Euro.   The same Apple/USD discussion above applies to this pair.  It is important for the new trader to understand:

If the EUR get stronger then the price of the pair will go up.
If the EUR gets weaker the price of the pair will go down.
If the JPY gets stronger then the price of the pair will go down.
If the JPY get weaker then the price of the pair will go up.

So when the price changes what is really happening ?   If the EUR/JPY pair goes up in price from 106.00 to 108.00 was it strengh in the EUR or weakness in the JPY?   In a trading environment where that is the only pair quoted you wouldn't know.  However we have many currencies to look at and they can be grouped together in Families .

Previous Topic : Bid Ask Spread             Next Topic : Currency Families