The majority of all foreign exchange trades involve the US dollar against another currency. This has historical reasons as well as being due to the fact that the US economy is the largest in the world and the global leader and benchmark. Many commodity markets are denominated in US dollars leading to an additional need for US dollar trading.
Traditionally, the German mark and the Japanese yen have been the basis of a lot of trading as well, with sterling and the Swiss franc trailing a little behind the three main currencies. Each of these markets has very distinct features relevant both in the past and now. The German mark has for all practical purposes been replaced by the Euro.
The dollar has suffered violent swings as the credibility of US economic policy has been questioned on many occasions. In the Eighties, in particular, the dollar moved from being the market darling to being dumped aggressively following the Plaza accord.
The German mark was a tower of strength over the past twenty to thirty years, due in particular to the widespread respect that the German central bank - the Bundesbank - enjoyed. But the traditional role of the Bundesbank as the world�s most dedicated inflation fighter was undermined after unification with the former East Germany and it has now been replaced as the most influential central bank in Europe by the European central bank.
The yen has been highly volatile in recent years, initially strengthening throughout the early nineties, then relieved by US support to the dollar. But in the past year or two, the longstanding Japanese problem of an appreciating exchange rate squeezing its exporting companies has returned as the yen turned dramatically after falling to 147 against the dollar. In October 1998, the most dramatic currency move in many years was seen as the dollar fell some 15% in just a few days against the Japanese currency. Japanese interest rates seem to be stuck at rock-bottom levels.
The Swiss franc serves, as does the dollar from time to time, as a “safe haven”. This is due to the isolation of the Swiss economy, its independent and neutral political stance and the secrecy of Switzerland’s banking system. The attractions of this combination have led to a relentless inflow of funds into Swiss francs in times of trouble and a resulting very low level of interest rates.
The pound, always a big part of foreign exchange markets and the first currency to be traded actively against the US dollar via the transatlantic cables (hence the description “cable”), has traditionally weakened against most other currencies. This tendency has been reversed in recent years and the pound will remain an interesting currency as it takes its place as one of the few key European currencies.
