The Japanese yen, the United States dollar, the Euro, and the British Pound Sterling: These currencies participate in a powerful group known as the G4 currencies.
They are the most formidable economies and the strongest currencies in the world.
The Euro (EUR)
The euro holds the place of the second most traded currency on the foreign exchange market. Coming in behind the United States dollar, the euro is the second-largest reserve currency globally.
It is the official currency of the majority of the countries within the European Union (EU). It was introduced to the markets in 1999 and has grown to more nations since.
Many countries within Europe and Africa peg their currencies to the euro, the same way other currencies around the world are linked to the dollar.
The purpose of pegging a currency is for the stability of the exchange rate the pegged currency provides.
The euro’s support comes from the EU’s economic growth and stability, substantial influence on the global economy, and solid currency integration causing improved efficiency in many financial markets.
Political events in the eurozone play a significant role in the frequency of trading the euro. And because of the diversity of nations within the EU, it just might be the most politicized currency currently in the forex market.
British Pound Sterling (GBP)
The British Pound Sterling rates fourth as the most traded currency in the foreign exchange market.
Even though the UK was part of the EU for many years (before Brexit), the UK never implemented the euro as its currency.
Besides being the national currency of the United Kingdom, It is the official currency in several countries, including:
- British Antarctic Territory
- Saint Helena
- Falkland Islands
- South Georgia and the South Sandwich Islands
- Isle of Man
- British Indian Ocean Territory
This currency is considered a vital benchmark currency for these nations, and it also acts as a reserve currency. Historically, it has had a high relative value in comparison to other world currencies.
The pound sterling is one of the strongest currencies in the world. Backed by the United Kingdom’s valuable exports, which include pharmaceuticals, cars, precious metals, machinery, and minerals, among other things, the pound sterling does very well.
Since these exports are usually in constant demand, the pound’s value tends to incline continuously.
Japanese Yen (JPY)
The Japanese yen, the official currency only in Japan, is a well-known currency in the foreign exchange market. It tends to do well in the carry trade, where traders seek to profit from the discrepancies in interest rates between two currencies.
It holds first place as the most traded of Asian currencies. Investors commonly use the yen to help determine the general health of the Pan-Pacific region, as it is the most traded of these currencies.
The Meiji government instituted the yen in the late 19th century. The yen’s design came from the European Decimal Monetary System.
Its value fluctuated throughout the 1900s, falling and approved to float when the participating countries scrapped the Bretton Woods Agreement but reaching a high in the early 1970s.
In recent years, the Japanese yen has become one of the top-performing currencies.
In 2018, CNBC deemed JPY to be one of the highest-performing currencies of the year. Since the Bank of Japan continues to retain a near-zero interest rate, the yen is very popular among traders in the foreign exchange market.
United States Dollar (USD)
The United States Dollar is a fundamental currency in the foreign exchange market. In 1944, the U.S. dollar became the world’s official reserve currency, a decision made in the Bretton Woods Agreement.
Many other countries linked their currency’s value to the dollar for stability instead of allowing the foreign exchange markets to drive the currency’s value freely.
Before this, many countries had pegged their currencies to gold under what was known as the “gold standard,” but after World War II, things changed. The gold standard was left behind.
According to the International Monetary Fund (IMF), about 59 percent of all foreign bank reserves are in U.S. dollars. Although the United States dollar is a very formidable currency in global markets, it is not the strongest globally, only ranking tenth on the list.
The U.S. economy supports the relative strength of the U.S. dollar. Since about 40 percent of the world’s debt is in dollars, foreign banks worldwide need substantial amounts of the currency to conduct business.
The G4 currencies are not to be confused with the G4 nations, which came together in 2005. The members of the G4 nations include India, Germany, Brazil, and Japan. These four countries uphold each other’s bids that seek permanent seats on the United Nations Security Council.
Although these four nations regularly serve as non-permanent members that serve two-year terms on the Security Council, they continue to seek the permanent slots.
It is essential to recognize the differences between the G4 nations and the G4 currencies, as they comprise of different countries and serve different purposes.