Today we’ll explore the categories of currency pairs.
Currency pairs are divided into three primary categories, majors, minors and exotics. The major currency pairs feature the US dollar on one side, either as the base or the quote currency. This is because the US Dollar is considered as the world’s reserve currency, a status established through the Bretton Woods conference agreement of 1944. During this conference, the US Dollar was fixed to a rate of $35 per ounce of gold. Even though the agreement was superseded by the free market system, the US dollar is still considered the global reserve currency. Major currency pairs remain the most frequently traded pairs globally and make up the largest share of the foreign exchange market. Examples of major currency pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD and AUD/USD.
The second category of currency pairs comprises cross-currency pairs, also known as minor currency pairs or “minors”. These pairs are highly liquid, but do not include the USD. They are often referred to as “cross rates” or “crosses”. The most actively traded cross-currency pairs are derived from the three major non-USD currencies: EUR, JPY, and GBP. Examples of cross-currency pairs include: EUR/GBP, GBP/JPY, EUR/CAD.
The third category of currency pairs is the exotic currency pairs. Exotic pairs consist of one major currency and the currency of an emerging economy or small economy on a global scale, such as Hong Kong, Brazil, or various European countries outside the Eurozone. Exotic pairs could include the US Dollar against the South African Rand, the US Dollar against the Turkish Lira, or the Euro against the Czech Krona. It’s important to keep in mind that while exotic currency pairs may offer the potential for higher profits, their volatile and occasionally unpredictability can pose challenges for traders. Additionally, lower liquidity and wider spreads are common issues faced by traders of exotic pairs.
