Currency Pairs Explained: Major, Minor, and Exotic Pairs
Every country has its own official currency. The United States uses the dollar, Great Britain has its pound, and Japan uses the yen. In the world of forex markets, different currencies are denoted by three-letter initials—USD, GBP, JPY, etc. The first two letters represent the country; the last letter usually indicates the currency’s name. It is easy to guess that USD comes from the United States Dollar and GBP comes from the Great Britain Pound.
The official currencies of two countries form a currency pair and are exchanged at a specific rate.
Currency pairs are conventionally divided into majors, minors, and exotics.
Major Currency Pairs
The major currency pairs consist of the US dollar and one of the other so-called major currencies (Euro, Japanese yen, British pound, Swiss franc, Canadian, Australian, or New Zealand dollars). The table below presents these pairs, their country of origin, and the “nicknames” they are known in the forex community.
Table 1: Major Currency Pairs. Source: tradepretty.com
Minor Currency Pairs
The minors, also known as crosses, do not include the US dollar. They are less frequently traded than the majors and, therefore, less liquid. For this reason, the costs of trading them are higher. There are numerous potential combinations of minor currency pairs. The most traded are the crosses of EUR, GBP, or JPY (e.g., EUR/JPY, GBP/JPY, EUR/GBP).
Exotic Currency Pairs
The exotics typically consist of one major currency (EUR, USD, GBP) and another originating from an emerging or smaller economy. Examples of such pairs are USD/THB (US Dollar/Thai Baht), EUR/TRY (Euro/Turkish Lira), and GBP/MXN (British Pound/Mexican Peso). Due to the lower trading volumes of exotic pairs, trading them can be more expensive than minors and majors.
Most Traded Currency
The US dollar is the most traded currency in the forex market (approximately 88% of all forex transactions), and the most traded pair is EUR/USD.
Conclusion
Currency pairs are conventionally divided into majors, minors, and exotics. The less liquid a currency pair is, the higher the trading costs tend to be.
Understanding the economic fundamentals of the two countries forming the currency pair is essential for its analysis.
