The Euro and the Dollar are perhaps two of the more prominent and high-profile currencies in the global economy. The Euro vs. Dollar (EUR/D’) currency pair boasts the highest daily trading volume, which means it has the biggest global trading volume. Its popularity is mostly attributed to its potential to strengthen against the U.S. dollar if the latter weakened against a similar time period. This is because the Euro is significantly stronger than the dollar both in terms of a country’s gross domestic product (GDP) and current exchange rates.
Traders who prefer to buy Euro rather than the conventional U.S. dollar would usually stick with this pairing, especially if they have already made prior purchases. There are, however, some traders who are attracted to the EUR/D’ currency pairing, especially those who want to hedge their exposure to the unstable housing market in Europe or the ongoing political and economic crises in the UK and in Europe as a whole. Some traders even take advantage of the varying interest rates between the UK and the rest of the G7 countries to trade with the Swiss franc and the euro. Nevertheless, most traders stick with the EUR/D’ pairing, especially considering the relatively stable interest rates between the UK and the rest of the G7 countries. They do so because they believe that trading in the EUR/D’ currency pair is more secure than trading in the Swiss franc or the euro.
In the past, trading in the EUR/D’ pair included more risk since the U.S. dollar was not yet strong enough to be the international standard against which the Swiss franc could be traded. On the other hand, since the UK government announced its intention to leave the European Union, the Swiss government has already indicated that it will retain the Swiss franc currency pairs. Consequently, traders have switched their focus to EUR/D’ instead of trying to hedge against the Swiss franc, although they may still do so if they feel safe trading in the other two currency pairs.
In order to hedge against the Swiss franc, traders buy the EUR and then trade it long in the hope that the Swiss government will reverse its decision and begin trading the CHF in the euro. If it does so, this would mean that the EUR-CHF pairs would then become the international standard against which the Swiss franc can then be traded. In short, this would mean that trading in the EUR/CHF currency pairs became more precarious since you would be betting against the Swiss government rather than trading for it. On the contrary, trading in the EUR/D’ currency pair provides you with less risk because you do not stand to lose as much as the Swiss government. Therefore, many traders prefer to maintain their long positions in the EUR/D’ currency pairs rather than make the switch to the CHF.
However, this might be a mistake because even though trading in the CHF is slightly cheaper than trading in the EUR/D’ for long positions, the rates of exchange against the CHF are still much higher. The reasons for this are simple – the CHF is not yet a fully functioning legal tender in Switzerland and therefore, there are few legal avenues through which Swiss citizens can draw upon in order to settle debts with one another. As such, the rates of exchange between the CHF and the EUR are higher than the rates of exchange between the CHF and the USD. In addition, the growing popularity of the EUR as a potential money-maker in Europe has made the CHF an even bigger factor inhibiting the use of the EUR for hedging.
Therefore, traders may find themselves in a puzzling position when they try to hedge against the Swiss franc by trading in the EUR/CHF pair. On one hand, trading in the EUR/CHF is safer than trading in the CHF since the CHF is not yet a legal tender in Switzerland. Moreover, trading in the EUR/CHF pairs also offers traders the opportunity to trade commodities without having to face any problems like high commissions or exchange rates due to political factors. On the other hand, trading in the CHF opens up several trading opportunities against the Swiss franc. Traders may be able to take advantage of these opportunities either to secure their position in the CHF or to reduce their risk in the Swiss franc by hedging against the EUR.
Traders who are new to trading in the currency pairs may find it difficult to determine where to begin their search. For this reason, it is important to take the help of a broker who can help traders identify the best currency pairs to hedge against the Swiss franc. A good broker will be able to provide important advice that will help traders choose which currency pairs should be traded and which should not. Moreover, a good broker will be able to provide valuable information on the strategies that are suitable for hedging against the Swiss franc. Finally, a good broker will also help traders reduce their risks by offering important options like stop-loss and leveraged trading in order to reduce the risks faced by the trader.
The most important thing about trading in the European currency pairs is that trading is done electronically, which eliminates the physical movement of the product across borders and increases the speed of transactions. This electronic means of trading also makes the process transparent. With the help of effective trading strategies, it is possible to reduce the risks associated with trading in the euro by hedging against the EUR/CHF pair. Effective strategies will require the knowledge of when it is the appropriate time to purchase or sell the euro and by analyzing the trading signals in a timely manner, traders will be able to determine the strength or weakness of the euro.