See also: Historical Perspective - Exchange Systems - US Federal Reserve - G7 Central Banks - Forex Spot Market - Forex Forward Market - Forex Futures Market - Currency Options
The United States dollar is the world's main currency and all currencies
are
generally quoted in terms of US dollars. Under conditions of international
economic
and political unrest, the US dollar became the main safe-haven currency
which was
proven particularly well during the South-east Asian crisis of 1997-1998.
The US dollar became the leading currency toward the end of the Second World War and was at the center of the Bretton Woods Accord, the other currencies being virtually pegged against it. The introduction of the euro in 1999 reduced the dollar's importance only marginally, although this situation is now changing.
The major currencies traded against the U.S. dollar are the euro, Japanese yen, British pound, and Swiss franc.
The euro was designed to become the premier trading currency by simply being quoted in American terms. Like the US dollar, the euro has a strong international presence stemming from members of the European Monetary Union. However, the currency remains plagued by unequal growth, high unemployment, and government resistance to structural changes amongst the 'Eurozone' countries.
The currency
also suffered in 1999 and 2000 by outflows from foreign investors, particularly
Japanese, who were forced to liquidate their losing investments in
euro-denominated
assets. Moreover, European money managers rebalanced their
portfolios and reduced their euro exposure as their needs for hedging
currency
risk in Europe declined.
The Japanese yen is the third most traded currency in the world, although possessing a much smaller international presence than the U.S. dollar or the euro.
The yen is very liquid around the world, practically around the clock. However the 'natural' demand to trade the yen concentrated mostly among the Japanese 'keiretsu', the economic and financial conglomerates.
The yen is much more sensitive to the fortunes of the Nikkei index, the Japanese stock market, and the real estate market. The attempt of the Bank of Japan to deflate the double bubble in these two markets had a negative effect on the Japanese yen, although the impact was short-lived.
Until the end of World War II, the pound was the currency of reference. Its nickname, "cable", is derived from the telex machine which was used to trade it in its heyday. The currency is heavily traded against the euro and the US dollar, but has a lesser presence against other currencies.
The two-year bout with the European Exchange Rate Mechanism (ERM), between 1990 and 1992, had a soothing effect on the British pound, as it generally had to follow the deutsche mark's fluctuations, but the crisis conditions that precipitated the pound's withdrawal from the ERM had a negative psychological effect on the currency.
Prior to the introduction of the euro, the pound
benefited from any
doubts about the currency convergence. After the
introduction of the euro, the Bank
of England is attempting to bring the high UK interest rates
closer to the lower rates in
the euro zone. It is possible that the pound could join the euro in the
early 2000s, provided that
a UK public referendum is positive and certain key economic criteria are met
both in the UK and amongst existing Eurozone members.
The Swiss franc is the only currency of a major European country that belongs neither to the European Monetary Union nor to the G-7 countries.
Although the Swiss economy is relatively small, the Swiss franc is one of the four major currencies - closely resembling the strength and quality of the Swiss economy and finance. Switzerland has a very close economic relationship with Germany, and thus to the euro zone.
Typically, it is believed that the Swiss franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss franc closely resembles the patterns of the euro, but lacks its liquidity. However, as the demand for it exceeds supply, the Swiss franc can be more volatile than the euro.