Why Do So Many Forex Pairs Use USD?

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Why Do So Many Forex Pairs Use USD?
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One of the most appealing aspects of forex trading is, of course, the fact that you are able to invest in multiple different currencies based all over the world. While this can mean that there are dips and peaks due to world events and politics, it could also mean that you are able to make passive income regularly.

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However, anyone remotely new to forex will likely notice that there is a strong interest in USD. What is it about the US dollar that makes it one of the most popular choices in pairs? Furthermore, is it entirely possible to make money on forex without having to rely on USD so much?

If you are just getting started in forex, there are naturally more than a few points you need to be aware of. The trading open position, for example, is just one element to strategy building that’s worth reading up on (and Forex Traders goes into some good detail).

The open position refers to a trade that is still yet to be decided. Therefore, as it is not closed, traders could still make a loss or a profit. Trades will normally only close from an open state if you choose to sell, or if you have a futures agreement that demands as much.

Trading in an open position can be risky, which is why many people choose to rely on USD when doing so. Open trading is likely to make you more vulnerable to big changes in a volatile market. However, an open position can increase the value of your gains as well as your potential for loss.

In the here and now, however, let us consider the strength of USD in forex, and why you will commonly see it arising in pairs across the board.

A History Of Strength

Believe it or not, the concept of USD being a strong contender in forex actually dates all the way back to World War II. After the conflict, many economies took a downturn as a result of the war efforts and rationing, and it would take considerable time for many countries to regain some form of economic stability.

USD, however, was riding high. The US actually emerged from WWII in a stronger position than most countries, indicating that its currency was one to watch. The fact that USD was once convertible to gold also helped matters. However, thanks to President Nixon, this hasn’t been a possibility for over 50 years now.

Therefore, much of the interest in USD via forex may simply be ingrained. While most traders in forex online now likely weren’t around back then, this does not mean that old habits do not die hard!

The Biggest Pairs Involve USD In One Way Or Another

Those pairs in forex that are considered the biggest or the most lucrative in some form largely involve USD’s influence. This, by and large, is due to its continued position as one of the strongest currencies available to trade in.

USD’s resilience amid the coronavirus pandemic and huge political shifts over the past few years indicate that this is a currency that traders want to get behind. While there are many forex strategies that involve riskier maneuvers, it is safe to say that some form of fallback is good to have in place.

The biggest pair in forex at the time of writing is undoubtedly EUR/USD. This, again, is despite large political waves and economic shifts in a very short space of time. The EU has had its own tremors to deal with in recent years, with maintaining the Brexit process and striving to quell copycat exits elsewhere on the continent. On the face of things, betting on USD and EUR may not have seemed so safe in the period 2016 to 2021.

This is largely due to trading volume, of course, with both the US and the Eurozone covering many different territories. In fact, the Eurozone itself is technically bigger than the US in terms of GDP, making this a very strong pair indeed.

There is also strength in USD and GBP. However, this is where USD will be used more in terms of being an anchor. GBP’s strength has fluctuated massively over the past few years, and this is largely due to Brexit and COVID-19. However, as GBP only covers a relatively small area (despite the UK’s strength in terms of global influence), it is clear to see why EUR is considered a safer bet.

Is It Possible To Make Money Away From USD On Forex?

Yes, it is entirely possible to make passive income from forex and not have to rely on USD wholesale. However, the point to remember here is that without USD as an anchor point, you are at risk of higher volatility, and therefore your risk potential increases exponentially.

Moving to a forex pair beyond USD is likely to be a brave move that you should make once you have further experience in trading. Just as you would need to be extremely careful when you buy the dip in crypto, you are going to need to be very careful with your analysis if you want to take the relative safety of USD away in forex.

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Ankur Shah is the founder of the Value Investing India Report, a leading independent, value oriented journal of the Indian financial markets. Ankur has more than eight years of equity research experience covering emerging markets, with a focus on India and South East Asia. He has worked as both a buy-side investment analyst for a global long/short equity hedge fund and a sell-side analyst for an emerging markets investment bank. Ankur is a graduate of Harvard Business School. You can learn more about his latest views on global markets at the Value Investing India Report. -- He can be emailed at [email protected]
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