Currencies are the main engines that power the world. Currencies make it easy for people to exchange goods and services. As such, it is always very difficult for countries that have volatile currencies. Two of these countries are Zimbabwe and Venezuela, which have destroyed the value of their currencies. Today, doing business in these countries is usually very difficult.
Currencies are never equal. For example, a currency like the US dollar is not taken equally as a currency like Kenyan shilling. In this article, we will look at the top 5 currencies in the world and some of their key characteristics.
The US dollar is one of the top 5 currencies in the world. This is because it is usually viewed as the world reserve currency. This happened after the Bretton Woods agreement in 1945. This is the same agreement that led to the creation of the International Monetary Fund (IMF) and the World Bank. The US dollar is the main currency that is used in world trade.
There are several factors that cause the dollar to move. These factors are employment data, trade numbers, inflation, manufacturing data, and consumer confidence. All these add up to determine the interest rates. High interest rates are usually positive for the USD. These rates are usually set by the Federal Reserve, which holds a meeting every month.
The other currencies we will look below usually depend partly by the level of trade. The USD is different because of the fact that the US is not the only country that uses the dollar for trade. The chart below shows the performance of the dollar index. This is an index that measures the performance of the USD against a basket of other currencies.
Euro is the main currency for the European Union. It is also one of the top 5 currencies in the world. The EU is the second-biggest economy in the world after the United States. It has a combined GDP of more than $18 trillion. As a result of this, the euro is the second most-popular currency in the world. As with the USD, the euro movements depend on the economic data from Europe. Most of the data from Europe is usually released by Eurostat. This data then impacts the decisions made by the European Central Bank, which is led by Christine Lagarde.
The EU does most of the trade with countries like China, United States, Japan, Switzerland, and Russia. As an export-oriented region, the ECB prefers the euro being weak. This is important because it helps the region’s export goods. The chart below shows the performance of the euro index.
Sterling, also known as the British pound, is also one of the top 5 currencies in the world. This currency is important because of the size of the UK economy and the role of The City. The City is the financial capital of the world.
As with the US dollar, the sterling moves according to the UK data such as employment numbers, inflation, and consumer confidence. All these numbers help the Bank of England in setting up interest rates. Higher rates are usually better for the sterling compared to lower rates.
The UK is known for its service industry, which is responsible for more than a third of its GDP. It is also known for its goods sector. The country’s biggest trading partners are China, the European Union, Sweden, and Japan among others.
In recent years, the focus of the market has been on Brexit. The happenings have led to a sharp decline of the sterling because of the importance role of the EU on the UK economy. The chart below shows the performance of the sterling index.
Japan is the third biggest economy after the United States and China. The country has a GDP of more than $5 trillion and is known for its huge export sector. Brands like Mitsubishi and Nissan are its pride. Most importantly, Japan is known for its large overseas investments. For example, Japan is the second holder of US debt after China.
Japan does a lot of international trade. Its biggest trading partners are countries like the United States, South Korea, China, and the European Union.
The Japanese yen has a special quality that other currencies mentioned above don’t have. In the investment circles, the currency is known for its role as a safe-haven currency. Investors tend to rush to it when investment risks rise.
For example, in 2018, when North Korea was testing missiles above Japan’s airspace, many expected the currency to decline. Instead, it rose because of its role as a haven currency. This happens because of the huge investments Japan has made overseas.
The Bank of Japan, led by Hurohiko Kuroda, is one of the most powerful central banks in the world. The chart below shows the performance of the yen index.
Switzerland is a relatively small economy. It has a GDP of more than $678 billion. Yet, the country’s currency is one of the most important in the world. This is partly because Switzerland does a lot of trade internationally. Some of its closest trading partners are in Europe, Japan, and North America.
As with the Japanese yen, the Swiss Franc is known for its role as a safe haven currency. There are two main reasons for this. First, Switzerland has made a lot of investments overseas. In fact, the Swiss National Bank is known for its huge investments in global stocks like Apple and Microsoft. Second, Switzerland is known for its neutrality. The country does not take sides in major global conflicts. Third, the Swiss banking industry is one of the strongest. This has seen many wealthy investors pack their money in the country. The chart below shows the performance of the Swiss franc index in the past five years.
Other Top Currencies in the World
The five currencies mentioned above are the most important in the world. Still, they are not alone. Below are other important and highly-liquid currencies in the world.
- Canadian dollar. This is also known as the Loonie, and is widely known as a commodity currency.
- Australian dollar. Also known as Aussie, the currency is known for its stability.
- New Zealand dollar. This is also known as the kiwi.
- Swedish krone. This is one of the currencies that constitute the dollar index.
- Chinese yuan. While China is the second-biggest economy in the world, its currency is not very popular.
- Bitcoin. BTC is an international currency that can be used to do transactions.
Summary on Top 5 Currencies in the World
The foreign exchange market is the biggest market in the world. Every day, people transact more than $10 trillion. As an investor, it is possible to make money trading these currencies. This is because the exchange rate changes every day. To do this, you should get a good forex broker and learn about how these currencies move. You can find our detailed guide to trading in forex here.
Crispus is a finance professional with more than a decade experience in the industry. Over the years, Crispus has written in-depth articles on leading platforms like CCN, Marketwatch, and Seeking Alpha. He also runs a Forex education and managed account company called WestEndFx.