A citizen of one country seeking to buy or sell in another country needs the other country’s currency. To get that currency, he can go to the foreign exchange market and buy the units of the foreign currency with his currency. The foreign exchange (forex) market is the largest and most liquid financial market on Earth. The Bank for International Settlements reported in April 2010 that, at current exchange rates, $4 trillion moved into and out of the forex market daily. (1) This is an unimaginably large number. Such gargantuan cash flows make the forex market so liquid, there is no fear whatsoever of cash shortage among any participants.

International banks, multinational corporations, central banks, world governments, tourists, travelers and private traders all participate in forex. Each one buys and sells foreign currencies for different reasons. Banks and businesses move sums of cash from one currency to another to satisfy depositor demands or pay shareholders and suppliers respectively. Cash flow across currencies is centered on the developed, industrialized world.

Currencies are always traded in pairs, since there is no neutral medium of exchange between any two currencies. Each currency’s price is quoted in the other currency. For instance, a traveler going to China from the United States seeks to exchange his U.S. dollars for Chinese Yuan. He goes to his bank and looks at the prevailing exchange rate between the two currencies, which is ¥6.45 for every $1. He then exchanges his dollars for Yuan at that rate.

Globally, there are 18 popular currency pairs that rule the forex market. These pairs involve the currencies of a key group of countries: Australia, New Zealand, Great Britain, Canada, Switzerland, Japan, the Eurozone and the United States. Each of these currencies are traded in pairs with the others. The U.S. dollar, as the reserve currency, dominates the forex market in terms of market share. The dollar is used in 85 percent of all forex transactions. This article is a guide to the most popular currency pairs. To keep it brief, the article will only focus on the three most popular currency pairs: EUR/GBP, EUR/JPY, and EUR/CHF.

EUR/GBP

Great Britain never fully adopted the Euro as its official currency, keeping the pound sterling (£). The exchange rate between the Euro and the pound is one of the most closely watched in the European Union. Britain is one of the EU’s chief exporters and one of the world’s largest economies. It has a strong effect on the rest of the world.

EUR/JPY

The Japanese economy is largely dependent on exports and imports. As a country with few natural energy resources, it must import most of its energy from foreign countries. The European Union, like most other industrialized nations, imports Japanese automobiles and electronics. Recently, free trade negotiations have taken place between Europe and Japan. (2)

EUR/CHF

The Swiss franc has been renowned for decades because of its stability and safe haven status against other currencies. The recent turmoil in the Eurozone over the debt crisis has provided multiple opportunities for traders. They can use the Swiss franc as an anchor, while they flip into and out of the Euro in order to profit on sudden upswings and downswings.