Currency trading can be incredibly lucrative - if you're good at it. Then again, it can be disastrous if you don't know what you're doing. The first step obviously is understanding the process and what drives currency fluctuations. The second step is knowing what you're trading. Some countries carry pretty risky currency markets. Because of this, the bulk of currency trading is done in a small number of currencies. Here are some of the most tradable currencies.
The Most Tradable Currencies in the World: Top 10
1. U.S. Dollar
Central Bank: Federal Reserve
The U.S. dollar is by far the most tradable currency in the world. A lot can be said about federal spending lately, but the U.S. dollar remains the most usable currency you can have. There's a reason it makes up the bulk of reserves across the globe. Many commodities are priced by the dollar. Commercial banks seek it for use in global transactions. It is simply the most important currency in commerce. The main reason behind this is simple. The U.S. has the largest economy. We also have vast power in international trade. Even now, when some of our trade arrangements are being brought into revision, the effect that it is having on global markets is significant. To that end, the dollar is a very tradable currency because you can essentially exchange it anywhere.
Though the dollar of the U.S. has been around a long time, the governing body that issues it only came into existence a little over 100 years ago. The Federal Reserve was created in 1913 in the hopes of making a more stable financial system. Serving as the central bank for the U.S., the Fed has a committee that oversees and votes on most of the monetary policy matters within the country. Coming from a largely capitalist economy, the dollar has multiple influencers including annual economic growth, fiscal policy, manufacturing, world events, and of course, currency exchanges. For example, if a nation like China were to dump its stockpile of U.S. dollars, it would impact China's benchmark against other major currencies.
CB: European Central Bank
The shared currency of the European Union, the euro is an interesting invention. The product of an attempt to unite Europe into a more singular market, the merits of the currency could be debated forever. It is however the currency of the European Central Bank, and holds great influence in world financial markets. It should be noted that not all members of the EU actually use the currency. The United Kingdom infamously uses its own currency, as well as Denmark. That said, the bulk of countries comprising the group do use the euro.
Unsurprisingly, the biggest influencers on the euro are the nations of the European Union. Formed in 1998, the European Central Bank works with the central banks of the member states to promote price stability and protect the banking system. The economies of the combined countries create a collective effect on how the euro performs. The European Central Bank has a committee similar to the United States Federal Reserve, where a governing council makes decisions on monetary choices. The council consists of the ECB's executive board, along with the governors of each nation's central bank. Lately, economic slowing within the European Union has barred the ECB from making any moves on interest rates. Therefore, rates remain negative.
3. Japanese Yen
CB: Bank of Japan
A key competitor in manufacturing, Japan's yen competes with many of the industrial countries to maintain a hospitable industrial environment within the country. Consequently, it is often fighting with China to keep cost effective manufacturing appeal to corporations. The yen is probably the currency most linked to its country's industrial export output, as Japan's economy is heavily dependent on trade goods; particularly exports.
Another key variable on the yen is oil prices. Japan imports a lot of its energy sources, so high energy prices can put a drag on the economy. Originating from 1882, the Bank of Japan is the governing body that handles monetary policy within the nation. Through the past few years, Japan has had incredibly low, and sometimes negative interest rates in an effort to spur growth. Suffice it to say that trade disputes are very damaging to Japan, and its currency.
4. British Pound
CB: The Bank of England
Though a member of the EU (for now) the United Kingdom has avoided sacrificing its currency; the pound. It would be fair to say that the drama surrounding "Brexit" continues to hold influence on this currency. Moreover, the trading of the pound vs. things like the yen can bring some volatility to exchanges. Over the past two years, the currency has been weakening against the U.S.dollar, and many have speculated over the outcomes that will come into effect should the U.K. truly have a "hard Brexit". Thanks to the higher volatility than, say, the long-term shifts of the euro, the pound is a popular currency for short-term trades.
The Bank of England, an institution that is over 300 years old, was nationalized after World War II, and serves as the central bank for the U.K. The bank targets stable prices, and therefore makes its choices based on a targeted inflation rate. Their website currently lists that target as 2%.
5. Swiss Franc
CB: Swiss National Bank
Another central bank that has negative interest rates implemented, the Swiss National Bank has an interesting structure involving private and public ownership. Established in 1907, the bank focuses on stability and monetary security, making the Swiss franc favored in times of economic downturns globally. Unfortunately for Switzerland, the country is also dependent on its business dealings with the EU. Therefore, a downturn abroad does influence the economic performance of Switzerland, which can impact the franc.
6. Canadian Dollar
CB: Bank of Canada
Canada's dollar, the "loonie," is overseen by the Bank of Canada. Because of the nation's large amount of exports in terms of natural resources, Canada's economic performance can be somewhat bound to commodities. If prices of their goods go down, there is less revenue potential for businesses. This can make it an interesting trade, as you can attempt to gauge its performance based off of what you see coming in commodities.
Unlike many of the European currencies listed prior, Canada maintains a higher interest rate, with recent figures at 1.75%. The Bank of Canada runs the country's monetary policy and the currency, and country, are highly integrated with oil prices.
7. Australian Dollar
CB: Reserve Bank of Australia
Another country rich with natural resources, Australia's dollar performance is also related to commodities, as they export quite a bit. These exports are balanced by a reliance on imports of oil, making the country's economy very reactive to commodity values on both ends of the spectrum. This is good knowledge when looking to trade the currency.
The Reserve Bank of Australia, opened in 1912, targets a model of price stability. The decisions made by the governing body are to help target an inflation rate of 2%, and avoid large disruptions. As of Aug. 6, the bank had an interest rate of 1%. Traditionally, Australia offers some higher rates compared to many central banks, but the last few years have forced the central bank to lower rates. As with Canada, this currency can be traded in speculation with commodities.
8. New Zealand Dollar
CB: Reserve Bank of New Zealand
The small and beautiful country of New Zealand is dependent on trade for its economic advances. In tune with that structure, its currency value goes hand in hand with the success and developments of those trade partnerships. Tied closely to Australia, you could say the two countries in interlinked in terms of success. New Zealand also has strong ties to China.
9. Swedish Krona
CB: Sveriges Riksbank
With the oldest central bank in the world, Sweden has a fascinating situation where its currency, the krona, is not a major reserve currency. The country's central bank, the Sveriges Riksbank, has grand control over the value of the currency based on their monetary policy. Moreover, Sweden is heavily dependent on trade with the rest of Europe and abroad. Therefore, the krona's value is dependent on the country's manufacturing/export base remaining strong.
10. Chinese Yuan
CB: People's Bank of China
Certainly the most controversial on this list, the Chinese renminbi, or yuan, was essentially pegged against the U.S. dollar for a very long time in the hopes of creating strong manufacturing conditions from a weak currency. In doing so, China created quite an industrial base for itself. It is not quite a speculative currency, as it is largely controlled by the centralized government. Even now, as they allow it to float a bit, it remains clear that China has used currency "manipulation" to its advantage. Controlled by the People's Bank of China, the central bank's rates have been held at considerably high levels compared to many others. Their 1-year lending rate is 4.35% at the time of writing, and has been for many years.
The yuan is easily one of the most interesting currencies, as the country as a whole needs strong exports to thrive. Therefore, the ongoing trade war with the U.S. is one of the first real tests of the central bank and the yuan in terms of global affairs affecting its value.