Over 90% of the transactions in the forex market involve the U.S. dollar. This is because the U.S. dollar is the reserve currency in the world. You may be asking yourself, “Why the U.S. dollar and not the sterling, or euro?”
Most agricultural and industrial commodities such as oil are priced in U.S. dollars. If a country needs to purchase oil or other agricultural goods, it would first have to change its currency into U.S. dollars before being able to buy the goods. This is why many countries keep a reserve of U.S. dollars on hand. They can make purchases much faster with Greenbacks already in their pocket.
Countries such as China, Japan, and Australia are examples of heavy importers of oil, and as a result, they keep huge reserves of U.S. dollars in their central banks. In fact, China has almost a trillion U.S. dollars in its reserve stockpile!
So what does this all have to do with trading currency crosses? Well since most of the world is glued to the U.S. dollar, a majority of trading speculation will be based on one question:
“Is the U.S. dollar weak or strong today?”
This one question will affect many of the most liquid currency pairs:
The majors: GBP/USD, EUR/USD, USD/CHF, USD/JPY
The commodity pairs: AUD/USD, USD/CAD, NZD/USD
Notice that all of these pairs are tied to the U.S. dollar. This doesn’t give a trader many options when most of their trading decisions are based on this one speculation.