Although the foreign exchange market is often billed as a banker's game, currencies can sometimes be great diversification for a portfolio that might have hit a bit of a rut. It's a market that can also offer tremendous opportunity when other global forums enter the doldrums. As a result, knowing a little bit about forex, and the fundamentals behind it, can make significant additions to any trader, investor or portfolio manager's arsenal. Let's take a look at eight currencies every trader or investor should know, along with the central banks of their respective nations. U.S. Dollar (USD). Central Bank: Federal Reserve (Fed). The Almighty Dollar. Created in 1913 by the Federal Reserve Act, the Federal Reserve System (also called the Fed) is the central banking body of the U.S.. The system is itself headed by a chairman and board of governors, with most of the focus being placed on the branch known as the Federal Open Market Committee (FOMC). The FOMC supervises open market operations as well as monetary policy or interest rates. The current committee is comprised of five of the 12 current Federal Reserve Bank presidents and seven members of the Federal Reserve Board, with the Federal Reserve Bank of New York always serving on the committee. Even though there are 12 voting members, non-members (including additional Fed Bank presidents) are invited to share their views on the current economic situation when the committee meets every six weeks. Sometimes referred to as the greenback, the U.S. dollar (USD) is the home denomination of the world's largest economy, the United States. As with any currency, the dollar is supported by economic fundamentals, including gross domestic product, and manufacturing and employment reports. However, the U.S. dollar is also widely influenced by the central bank and any announcements about interest rate policy. The U.S. dollar is a benchmark that trades against other major currencies, especially the euro, Japanese yen and British pound. (For further reading about trading this currency, see "Taking Advantage of a Weak U.S. Dollar."). European Euro (EUR). Central Bank: European Central Bank (ECB). The Dollar's Nemesis. Headquartered in Frankfurt, Germany, the European Central Bank is the central bank of the 17 member countries of the eurozone. In similar fashion to the United States' FOMC, the ECB has a main body responsible for making monetary policy decisions, the Executive Council, which is composed of five members and headed by a president. The remaining policy heads are chosen with consideration that four of the remaining seats are reserved for the four largest economies in the system, which include Germany, France, Italy and Spain. This is to ensure that the largest economies are always represented in the case of a change in administration. The council meets approximately 10 times a year. (Read more about how central banks control inflation in "What Are Central Banks?") In addition to having jurisdiction over monetary policy, the ECB also holds the right to issue banknotes as it sees fit. Similar to the Federal Reserve, policy makers can interject at times of bank or system failures. The ECB differs from the Fed in an important area: Instead of maximizing employment and maintaining stability of long-term interest rates, the ECB works towards a prime principle of price stability, with secondary commitments to general economic policies. As a result, policymakers will turn their focus to consumer inflation in making key interest rate decisions. Although the monetary body is somewhat complex, the currency is not. Against the U.S. dollar, the euro (EUR) tends to be a slower currency compared to its colleagues (i.e., the British pound or Australian dollar). On an average day, the base currency can trade between 30-40 pips, with more volatile swings averaging slightly more, at 60 pips wide per day. Another trading consideration is time. Because the FX market is open 24/7, forex traders must strategically set FX trading schedules. Trading in the euro-based pairs can be seen during the London and U.S. sessions (which occur from 2 AM through 11 AM EST).
