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Which Currency Tracks What and Why
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The most popular or heavily weighted currency against the dollar is the euro. There are several considerations and nuances that each individual currency tracks, as each not only is affected by the U.S. dollar but also is manipulated by its own country's economic and political influences. From a historic perspective, let's examine the top-five major currencies and what influences their values:

1. The Euro. The euro was first introduced to world financial markets as a currency in 1999 and was finally launched with physical coins and banknotes in 2002. The European Union is composed of these member countries: Austria , Belgium , Greece , Germany , France , Ireland , Italy , Luxembourg , the Netherlands , Portugal , and Spain . The largest mem bers are considered socialist countries; and as a result, these countries tend to run the largest governmental budget deficits. The European Central Bank (ECB) dictates monetary policy and puts more emphasis on inflation concerns than it does on economic contraction. We have seen in the past where the ECB would rather maintain steady interest rates in periods of slower economic growth than lower rates and risk igniting inflationary pressure. As a result, the ECB is less likely to fre quently adjust rates.

2. The Japanese Yen. The Japanese economy depends on sales of ex port. For the most part, Japan is a net importer of raw material goods, especially crude oil. Japan 's economic machine hinges on foreign de mand for their manufactured goods. Their main customers are the U.S. consumer and Europe . One of the biggest concerns that faced the Bank of Japan (BOJ) in the 1990s was deflationary pressures. This compelled the BOJ to keep what was known as a zero-interest policy to help reignite its economy. In turn, it also artificially kept the value of the yen low as many savvy investment funds made billions of dollars in what is known as a carry trade—one entity would borrow cheap money at nearly zero interest, export those funds to another country, and park them in a higher-interest-bearing account. This transaction prompted selling of yen to buy the currency in which those funds were to be in vested or parked. U.S. Treasury notes and bonds as well as German bunds were the target of these transactions. As a result, the yen would trade lower against the U.S. dollar and the euro. Therefore, trading the yen/euro cross pair is a viable market to trade. One more consideration when focusing on factors that can influence the yen's value is that China is one of Japan 's competitors. Since China also artificially floats its currency, the yuan, against the U.S. dollar, China 's monetary policy also weakens or can put downward pressure on the yen's value.

3. The British Pound. The Bank of England (BOE) is in charge of dic tating monetary policy in the Unted Kingdom . One of the main influ ences on Britain 's economy is oil production in the North Sea . Money may make the world go round, but energy keeps it running. With that said, you will see in history that as oil prices rise, the British pound also tends to follow suit. However, oil supplies are dwindling in the North Sea , and Britain is using more and more natural gas. As of August 2006, Britain was Europe 's biggest consumer of natural gas, and it is continuously increasing imports of the fuel to make up for declines in crude oil production. As a result, natural gas prices in Britain have risen an average of 60 percent from 2005 through 2006. It is now reliant on natural gas and susceptible to economic risk expo sure if there are outrageous price spikes in the cost of that product. As of 2004, Britain became a net importer of natural gas. If natural gas prices spiral out of control, this factor can influence consumer spend ing or can create a surge in inflationary pressure; and that would jus tify action by the Bank of England to change monetary policy. This scenario could influence the value of the British pound. The pound is also sensitive to economic developments of its European neighbors. Therefore, trading the cross of the euro against the pound is a very liq uid trading relationship.

4. The Canadian Dollar. The Canadian dollar is often referred to as the “loonie.” The French equivalent of loonie is huard, which is French for loon, the bird that appears on the face of the Canadian one dollar coin. The Bank of Canada (BOC) sets monetary policy as it is the central bank for that country. Back in November 2000, the BOC adopted the system of eight meetings each year, in which it announces whether it will change its interest rate policy, just as in the United States . Canada is rich in natural resources, especially crude oil. The primary source of Canada 's growing crude oil supplies are vast oil sands reserves. Oil sands production, which exceeded the 1 million barrels per day (b/d) plateau late in 2003, is forecast to more than double by 2015 to almost

2.6 million barrels per day. With 175 billion barrels of reserves, it is the second-largest petroleum deposit in the world. Since the United States is Canada 's biggest client, as oil prices rise, the value of the Canadian dollar will be supported in value.

5. The Swiss Franc. The Swissy, as it is called, is considered the safe haven currency, as it is backed by gold. The Swiss National Bank makes monetary policy decisions based on events that impact the value of gold as they influence the value of the currency. Factors that influ ence the Swiss franc are inflation, excessive economic growth or peri ods of economic contraction, and periods of political instability. The

Swiss franc tracks the value of the euro; but during periods of Euro pean upheaval, as occurred in 2004 when there existed dissention among members of the European Union, the Swiss franc will outperform the euro.

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