Important Currencies

Although the United Kingdom is the major location of foreign exchange trading, the U.S. dollar is the currency that dominates the foreign exchange market. Because the U.S. dollar is so widely used in world trade, it is considered a vehicle currency - a currency used as an intermediary to convert funds between two other currencies. The currencies most often involved in currency transactions are the U.S. dollar, British pound, Japanese yen, and European Union euro.

The U.S. dollar is a vehicle currency for two main reasons. First, the United States is the world's largest trading nation. Because the United States is so heavily involved in international trade, many international companies and banks maintain dollar deposits, making it easy to exchange other currencies with dollars. Second, following World War II, all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency. In turn, the dollar's value was tied to a specific value of gold - a policy that held wild currency swings in check. Although world currencies are no longer linked to the value of gold, the stability of the dollar, along with its resistance to inflation, helps people and organizations maintain their purchasing power better than their own national currencies. Even today, people in many countries convert extra cash from national currencies into dollars.