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G3 Currencies

Published by Jonathon Jachura

Reviewed by Bowen Khong, ACCA

The G3 currencies are considered to be three of the most important currencies in the world. This is because they are the most traded and most liquid currencies on the foreign exchange market. 

What Are The G3 Currencies?

The G3 currencies include the U.S. dollar (USD), the Japanese yen (JPY), and the euro (EUR). According to the International Monetary Fund (IMF), these three currencies are “anchor currencies.”

Why Are The G3 Currencies So Formidable?

The G3 currencies are incredibly powerful because they each have several excellent characteristics. For the most part, each of the three currencies’ strength comes from their substantial economic clout and longstanding political stability. 

These currencies also continually experience sustained growth and have a solid financial and banking system. The G3 currencies do not always showcase each of these attributes, but they do commonly exhibit them.

The U.S. Dollar (USD)

The U.S dollar holds the title of the world’s most vital reserve currency. Many central banks have reserves in U.S. dollars. 

The IMF reports that upwards of 60% of the world’s foreign currency reserves are in U.S. dollars. On the other hand, about 40% of the world’s debt is denominated in U.S. dollars. 

The dollar is the benchmark currency for the global commodity, which lends to its stability as a form of exchange. This means that as the value of the dollar drops, the price of commodities rises in dollars but drops in foreign currencies. 

As the world’s most essential reserve currency, it plays a role in about 87% of all foreign exchange. This translates to the vast majority of foreign exchange comprising of currencies exchanged to or from USD.

Sixteen countries utilize the U.S. dollar as their official currency. As of the end of 2020, the IMF reported total broad money in the USA totaling $23,302.05 trillion. 

How Did The U.S. Dollar Become The World’s Reserve Currency?

Long considered one of the world’s strongest currencies; the U.S. dollar received the world’s reserve currency title many years ago. The current dollar began its journey in 1914 following the development of the Federal Reserve Bank. 

In 1913, as a response to the instability and unreliability of the currency system banks previously used, the Federal Reserve Bank was created by the Federal Reserve Act of 1913. 

At this time, the U.S. economy surged– it became the world’s largest, climbing past the United Kingdom. 

Several countries, including the UK, pegged their currency to gold for stability in currency exchange. However, when World War I broke out in 1914, many countries temporarily abandoned the gold standard. 

During World War II, many Allies paid the U.S. in gold for their supply of weapons and other goods, as the U.S. was their leading supplier. 

This depleted many nations’ gold reserves, rendering the return to the gold standard impossible. As such, the Bretton Woods Agreement was developed, with input from many international players, as a way to combat this issue. 

The arrangement decided that the world’s currencies wouldn’t be pegged to gold any longer but instead linked to the U.S. dollar, as it directly connected to gold (at the time). 

This sequence of events led to the U.S. dollar receiving the title as the world’s reserve currency, as it was backed by the world’s most substantial gold reserves due to the Bretton Woods Agreement. 

The Euro (EUR)

The euro made its introduction into circulation in 1999. By 2002, 12 European countries used the euro as their currency. Today, it is the second most traded currency in the foreign exchange market, following the dollar. 

According to the BIS report on forex volumes done in April of 2016, the average daily amount traded comes in at 1,591 billion dollars. 

When it began circulating in 2002, the European Central Bank handled its issuance. This is a unique institution as it is the only central bank globally responsible for several countries’ monetary policy. 

Although it shares several vital characteristics, this currency isn’t labeled a safe haven like the U.S. dollar. 

  • The eurozone seems to maintain a current account surplus continually. 
  • Just over a third of all transactions completed worldwide involve the euro. 
  • In 2019, the combined debt of all eurozone countries totaled 78% of the currency area’s GDP, which is lower than both the United States and Japan.

The euro is not considered a safe haven currency due to political conditions which confer economic instability. However, this form of currency is common in trading because of its influence on the global economy and price stability. 

Nineteen countries, all of which are members of the European Union, use euros as their official currency. 

The Japanese Yen (JPY)

The Japanese yen is the third most traded currency on the foreign exchange market and is also considered a safe-haven currency, like the dollar. 

Although Japan has had its economic struggles for the past two decades, it has continued to hold steady in its place as the world’s third-largest economy. 

Since the early 1990s, Japan has experienced year-over-year growth, but it rarely surpasses two percent. They have a recurring deflation issue and an incredibly high public debt, which is the largest globally compared to GDP. 

Regardless of these struggles, the Japanese yen continues to be considered a safe-haven currency. 

The reasons are primarily the result of two essential components: Japan has a substantial trade surplus and specializes in high-tech products, from exports like automobiles to high-end technologies. 

Japan also holds its status as the world’s third-largest economy in terms of GDP, closely following the United States and China. 

The Japanese yen is solely used in Japan as the country’s official currency. However, it is prevalent within international trading due to the incredibly low-interest rates that promote the yen’s value. 

At the end of 2020, the IMF reported total broad money of JPY 1,516,800.00 trillion. 

Group Of Three

Not to be confused with G3 currencies, the term “G3” was also used to represent an agreement between three countries. 

From 1995 to 2005, “G3” was used to reference a free trade agreement between Mexico, Colombia, and Venezuela. It did not last long and technically dissolved when Venezuela left instead of renewing the deal in 2006. 

Although Columbia and Mexico continued their agreement with free trade for just under a decade longer, the group has since disbanded.

Jonathon Jachura
Jonathon Jachura
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