Key Currency Exchange Rates

Why This Matters

Currency exchange rates sit at the heart of international finance, connecting everything from central bank policy and interest rate differentials to global trade flows and investor risk appetite. When you analyze a currency pair, you're really analyzing the relative economic health, monetary policy stance, and market confidence between two nations—concepts that appear repeatedly on exams covering balance of payments, purchasing power parity, interest rate parity, and capital flows.

Understanding exchange rates isn't about memorizing which currency is "stronger." You're being tested on why rates move: What happens when the Fed raises rates? Why do investors flee to certain currencies during crises? How do commodity prices transmit through exchange rates? Don't just memorize the pairs—know what economic principle each one best illustrates.

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Major Reserve Currency Pairs

These pairs involve the world's most liquid currencies and serve as benchmarks for global financial markets. Their movements reflect broad shifts in monetary policy expectations, risk sentiment, and relative economic performance between the largest developed economies.

EUR/USD (Euro to US Dollar)

• Most traded currency pair globally—represents approximately 24% of daily forex turnover, making it the primary benchmark for currency markets
• Driven by interest rate differentials between the European Central Bank and Federal Reserve, with capital flowing toward higher-yielding currencies
• Key indicator of transatlantic economic sentiment—widening spreads often signal diverging growth trajectories or policy expectations

USD/JPY (US Dollar to Japanese Yen)

• Highly sensitive to interest rate differentials—Japan's historically low rates make this pair a favorite for carry trades, where investors borrow yen to invest in higher-yielding assets
• Safe-haven dynamics cause yen appreciation during market stress as investors unwind risky positions and repatriate capital
• Bank of Japan intervention risk—Japanese authorities occasionally intervene to prevent excessive yen strength that could harm export competitiveness

GBP/USD (British Pound to US Dollar)

• Known as "Cable"—named for the transatlantic telegraph cable that once transmitted exchange rates between London and New York
• Highly reactive to political risk, particularly Brexit developments, trade negotiations, and UK fiscal policy announcements
• Reflects relative monetary policy between the Bank of England and Federal Reserve, with rate expectations driving short-term movements

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Safe-Haven Currency Pairs

Safe-haven currencies appreciate during periods of geopolitical tension, financial market stress, or economic uncertainty. This phenomenon reflects capital flight to perceived stability, where investors prioritize capital preservation over returns.

USD/CHF (US Dollar to Swiss Franc)

• Swiss franc is the quintessential safe-haven currency—Switzerland's political neutrality, stable banking system, and current account surplus attract capital during crises
• Swiss National Bank actively manages franc strength through negative interest rates and occasional intervention to protect export competitiveness
• Inverse correlation with risk appetite—franc typically strengthens when equity markets fall and credit spreads widen

USD/JPY (Safe-Haven Dimension)

• Dual role as both carry trade vehicle and safe haven—during calm markets, yen weakens as investors borrow cheaply; during stress, yen surges as positions unwind
• Repatriation flows from Japanese institutional investors amplify yen strength during global downturns
• Volatility indicator—sharp yen moves often precede or accompany broader market dislocations

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Commodity-Linked Currency Pairs

These pairs move in correlation with global commodity prices because the non-dollar currency belongs to a major commodity exporter. The transmission mechanism runs through trade balances, terms of trade, and resource sector investment flows.

AUD/USD (Australian Dollar to US Dollar)

• Strong correlation with iron ore and gold prices—Australia's export dependence on commodities creates direct links between resource prices and currency value
• Proxy for China demand—as China's largest commodity supplier, the Australian dollar often moves with Chinese economic data and growth expectations
• Risk-on/risk-off sensitivity—the "Aussie" tends to rally during global growth optimism and sell off during risk aversion

USD/CAD (US Dollar to Canadian Dollar)

• Inverse correlation with crude oil prices—Canada's oil sands production makes this pair one of the most reliable oil proxies in currency markets
• Tight economic integration with the US means Canadian growth closely tracks American business cycles, moderating some currency volatility
• USMCA trade dynamics—policy changes affecting North American trade flows directly impact the Canadian dollar's fundamental value

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Emerging Market Currency Pairs

Emerging market currencies offer higher yields but carry greater volatility due to political risk, less liquid markets, and vulnerability to capital flight. These pairs demonstrate how developing economies face different exchange rate dynamics than advanced economies.

USD/CNY (US Dollar to Chinese Yuan)

• Managed float system—the People's Bank of China sets a daily reference rate and allows trading within a band, making this pair partially market-determined
• Trade policy sensitivity—tariffs, sanctions, and trade negotiations directly impact expectations for yuan valuation
• Reserve currency aspirations—China's efforts to internationalize the yuan create tension between currency stability and market liberalization

USD/INR (US Dollar to Indian Rupee)

• Current account deficit pressure—India's persistent trade deficits create structural depreciation pressure on the rupee
• Reserve Bank of India intervention—active foreign exchange management aims to smooth volatility rather than target specific levels
• Sensitive to oil prices—as a major oil importer, India's trade balance and inflation both worsen when crude rises, pressuring the rupee

USD/MXN (US Dollar to Mexican Peso)

• Highest liquidity among emerging market pairs—Mexico's proximity to the US and deep financial integration create robust trading volumes
• Nearshoring beneficiary—supply chain shifts favoring North American production support peso fundamentals
• Remittance flows from Mexican workers in the US provide consistent dollar supply, partially offsetting trade-related pressures

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Cross Rates and Regional Dynamics

Cross rates exclude the US dollar entirely, revealing direct economic relationships between other currency zones. These pairs isolate bilateral dynamics without dollar-driven noise.

EUR/GBP (Euro to British Pound)

• Pure UK-Eurozone relationship—removes dollar influence to show relative economic performance and policy divergence across the English Channel
• Brexit barometer—trade negotiation progress, regulatory alignment, and border friction directly move this pair
• Interest rate differential focus—with similar risk profiles, Bank of England vs. ECB policy expectations dominate price action

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Quick Reference Table

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Self-Check Questions

1. Which two currency pairs would you expect to move most similarly during a global "risk-off" event, and what mechanism explains their correlation?

2. If crude oil prices rise 20%, which currency pair would you expect to see the largest move, and in which direction? What about if iron ore prices surge instead?

3. Compare and contrast how USD/CHF and USD/JPY function as safe havens—what different capital flow mechanisms drive each?

4. An FRQ asks you to explain how central bank interest rate decisions affect exchange rates. Which currency pair provides the clearest example of interest rate differential dynamics, and why?

5. What distinguishes USD/CNY from other emerging market pairs like USD/INR in terms of exchange rate determination, and what trade-offs does China's approach create?