The Dollar’s Global Role in Forex

You have probably noticed by now that the US Dollar is the common denominator between all of the different types of currency pairs—exotics, cross-majors, and major currency pairs.

The US dollar is incredibly important to international commerce, which is partly to do with history as much as it is partly to do with the present.

Exotic Currency Pairs

Exotic currency pairs are currency pairs that include the US dollar, and another currency from a riskier, emerging market currency. These currencies—USD/THB, USDMXN, USD/NOK, among others—are not highly liquid, and come with greater spreads in the bid and ask prices.

The list of exotic pairs is far longer than the list of 7 major currencies. It includes all currency pairs in which the US dollar is included, but another less commonly traded currency is pair with it. Trading these pairs can be costly since there are fewer market participants and traders buying and selling them, and brokers usually raise the costs to trade less popular pairs.

Major Currency Pairs

Just like there are small investors and large investors, there are small currencies and large currencies. In general, currencies are “large” or “small” depending on how popular they are with investors and traders in the foreign exchange market.

Prices Are Relative in Forex Trading

Let’s pick up where we left off in the last article on the basic happenings of the foreign exchange market. We mentioned that people buy and sell currencies for one another, but we need to establish how these prices are set.