Major Currency Pairs in Forex

Why This Matters

Currency pairs are the foundation of international economics in action—they're where exchange rate determination, interest rate differentials, capital flows, and trade balances all converge into real, tradeable prices. When you study these pairs, you're not just memorizing ticker symbols; you're seeing how monetary policy decisions in Washington ripple through Tokyo, how commodity price shocks in Australia affect global investment patterns, and how political uncertainty in London can reshape capital flows overnight.

For exam purposes, you're being tested on your ability to connect specific currency movements to underlying economic mechanisms. Can you explain why a Fed rate hike strengthens the dollar against the yen? Do you understand why commodity currencies move differently than safe-haven currencies during a crisis? Don't just memorize which currencies are paired—know what economic forces drive each pair and how they illustrate broader concepts like purchasing power parity, interest rate parity, and the balance of payments.

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Safe-Haven Pairs: Flight to Quality in Action

When global uncertainty rises, capital doesn't disappear—it moves. Safe-haven currencies attract investment during crises because they're backed by stable political systems, strong institutions, and historically reliable monetary policy. These pairs reveal how risk perception drives international capital flows.

USD/JPY (US Dollar/Japanese Yen)

• Interest rate differentials drive this pair—the gap between Federal Reserve and Bank of Japan rates determines which direction capital flows, making this a textbook example of interest rate parity
• Safe-haven dynamics cause the yen to strengthen during global turmoil, as investors unwind risky positions and repatriate capital to Japan
• Carry trade indicator—when investors borrow in low-yielding yen to invest in higher-yielding assets, this pair reflects global risk appetite in real time

USD/CHF (US Dollar/Swiss Franc)

• Swiss neutrality and banking stability make the franc a classic safe-haven currency, demonstrating how political risk premiums affect exchange rates
• Swiss National Bank intervention provides a case study in managed floating exchange rates—the SNB has historically intervened to prevent excessive franc appreciation
• Hedge against European instability—during Eurozone crises, capital often flows from euros to francs, showing regional contagion effects

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Commodity-Linked Pairs: Resource Dependence in Exchange Rates

These currencies demonstrate how a nation's terms of trade directly affect its exchange rate. When a country's primary exports rise in value, demand for its currency increases as foreign buyers need local currency to complete transactions. This is comparative advantage made visible.

AUD/USD (Australian Dollar/US Dollar)

• Commodity price transmission—Australian dollar strength correlates with iron ore and gold prices, illustrating how export revenue expectations drive currency demand
• China linkage makes this pair a proxy for Chinese economic health, since Australia's largest trading partner determines demand for Australian commodities
• Risk-on indicator—the "Aussie" strengthens when global investors feel confident, weakens during flight-to-safety episodes

USD/CAD (US Dollar/Canadian Dollar)

• Oil price correlation is the defining feature—Canada's status as a major petroleum exporter means the "loonie" tracks crude prices, demonstrating resource curse dynamics in developed economies
• Trade integration effects from USMCA mean this pair also responds to North American manufacturing data and cross-border supply chain health
• Interest rate sensitivity to both Fed and Bank of Canada decisions shows how monetary policy divergence creates exchange rate movements

NZD/USD (New Zealand Dollar/US Dollar)

• Agricultural commodity focus—dairy prices (especially the Global Dairy Trade auction) directly impact the "kiwi," showing how specialized export dependence creates currency volatility
• China trade exposure parallels AUD/USD, making both pairs move similarly during shifts in Asian demand expectations
• Smaller economy, higher volatility—demonstrates how market liquidity affects exchange rate stability; less trading volume means sharper price swings

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Major Economy Pairs: Policy Divergence and Trade Flows

The most liquid currency pairs represent the world's largest economies, where monetary policy decisions, trade balances, and GDP growth differentials create sustained exchange rate trends. These pairs move on macroeconomic fundamentals more than short-term sentiment.

EUR/USD (Euro/US Dollar)

• World's most traded pair—representing roughly 20% of daily forex volume, this pair demonstrates how liquidity reduces transaction costs and tightens bid-ask spreads
• ECB vs. Fed policy divergence is the primary driver; when the Fed tightens while the ECB holds steady, capital flows toward dollar-denominated assets
• Global risk barometer—because both economies are so large, this pair reflects overall market confidence and serves as a benchmark for other currency movements

GBP/USD (British Pound/US Dollar)

• Political risk premium in action—Brexit demonstrated how policy uncertainty can cause sustained currency depreciation independent of economic fundamentals
• Higher volatility than EUR/USD despite similar economic profiles, showing how market perception of stability affects exchange rate behavior
• Historical "Cable" nickname references the transatlantic telegraph cable that first transmitted prices—a reminder that forex markets have always been about information transmission speed

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Quick Reference Table

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Self-Check Questions

1. Which two currency pairs would you expect to strengthen during a global financial crisis, and what mechanism explains this movement?

2. If China announces weaker-than-expected GDP growth, which currency pairs would be most affected and in which direction? Explain using the concept of trade linkages.

3. Compare and contrast how USD/CAD and AUD/USD respond to commodity price changes—what specific commodities matter for each, and why does this distinction matter for understanding terms of trade?

4. The Federal Reserve raises interest rates while the European Central Bank holds rates steady. Using interest rate parity, explain the expected movement in EUR/USD and the capital flow mechanism behind it.

5. An FRQ asks you to explain how political uncertainty affects exchange rates. Which currency pair provides the strongest recent example, and what specific event would you reference?