What is the relationship between major currencies in general?

What is the relationship between major currencies in general?

There are six major currencies traded and used as benchmarks on Forex markets: United States Dollars, Euros, Yen, British Pounds, Australian Dollars, Canadian Dollars, and Swiss Francs.

There are also relationships between these and others, known as currency correlations. Currency exchange rates can be fixed or floating, and this is determined by policy within the country and how they want to value their money.

Most currencies-- and the most traded currencies-- are floating, meaning that their value is dependent on the market. If the central bank in a country exercises a lot of interventionist policies to manipulate the exchange rate, it is sometimes called a dirty float or managed float.

Fixed exchange rates are also called pegged currencies, meaning a country has decided that it will use a set rate of exchange between their currency and a specific foreign currency (usually the US Dollar, but they could use another currency or even a commodity such as gold) to value their money, and so their currency value will follow the value of the currency (or commodity) to which theirs is pegged.

Pegging can also be done with a blend of foreign currencies and commodities. The exchange rates between two currencies are called currency pairs.

A currency’s value can really only be represented in terms of currency pairs because you have to compare it to something (a commodity can also be used). Some currencies have a very strong positive or negative correlation to one another, and this is represented on updated currency correlation tables.

These relationships will change, so it is important to check for the most recent data if you intend to trade using this data, and, because they change, it is important to remember that it may not work out the way you hoped.

The data will be represented in terms of currency pairs, such as GBP/USD (which is Pounds to Dollars): one currency pair only gives you one number, as in 1.253 is the number of Dollars it takes to equal one Euro, as a hypothetical example for GBP/USD. So on a currency correlation table, we’re looking for a correlation between the exchange rate of one currency pair and the exchange rate of another currency pair.

If we find a strong positive correlation, and the two exchange rates diverge from the correlation for a time, it may be a trading opportunity, since they will most likely return to their “normal” state. This is called scalping. You can also use correlations between commodities and even major global market indexes.