The 6 Most-Traded Currencies And Why They're So Popular

Your Cambodian riel notes are probably great conversation pieces, the late King Norodom Sihanouk’s solemn visage glancing at the people to your left as you regale them with tales of your visit to Angkor Wat and Angkor Thom. But as international trading commodities, those notes don’t have quite as much utility. In fact, the overwhelming majority of currencies are of limited use outside their countries of issue. Even though there are 180 currencies in circulation throughout the world and majority of worldwide foreign exchange transactions involve a mere half-dozen of those currencies. It’s an extreme instance of thePareto principle, with real-world applications. Here’s a look at those select currencies, and how they came to dominate the markets.

As any international traveler will confirm, the demand for United States Dollars across the globe is enormous and without serious competition. The cab drivers at the Ulan Bator airport in Mongolia will take only one non-Mongolian currency, and it’s neither the Russian ruble or the Chinese yuan. Thanks to a relatively stable government, a historically dynamic economy, and consistent value (low inflation) over time, the U.S. dollar serves as the de facto universal medium of exchange. Or to use the chosen term of art, the world’s primaryreserve currency.

As the reserve currency, the U.S. dollar is the predominant one held by foreign governments for international transactions. The advantage to American travelers abroad is obvious, but the U.S. dollar’s exalted status also benefits those who never leave the country. American individuals and institutions not only save on transaction costs when purchasing across borders, but can borrow money at lower rates. Furthermore, imports to the United States cost less thanks to the U.S. dollar’s consistent store of value vis-à-vis other currencies. (Though the inevitable flip side to this is that U.S. exports are correspondingly more expensive.)

The U.S. dollar’s dominance across the world is not slim. Any time a pair of currencies are traded for each other in the marketplace, there’s a 44% chance that one of the currencies being purchased or sold is the redoubtable greenback. Some countries’ economies are so intertwined with or dependent on the United States’ that those nations have unofficially adopted the U.S. dollar as their own. The Bahamian dollar and the Bermudian dollar, for instance, are set de jure as exactly equivalent to their U.S. counterpart. 

A currency transaction requires a second currency, of course. And when U.S. dollars (or any other currency) are traded, a plurality of the time they’re being traded for a currency that didn’t even exist in physical form until this century - the euro. As the official currency of everywhere from Portugal to Finland, from Slovenia to Slovakia, the second most-traded currency in the world is used daily by more than half a billion people throughout both Europe and Africa, dwarfing even the U.S. dollar in that respect. As the eurozone continues to expand – it began this year by welcoming Latvia, and Lithuania is scheduled come on board in 2015 – the euro’s importance in foreign exchange will only increase.
Source:http://www.investopedia.com/