What Comprises the G10 Currencies? Origin and Significance

What Comprises the G10 Currencies? Origin and Significance

The term G10 currencies today refers to a group of major currencies widely traded in currency markets. As a result, there is usually no problem with liquidity when executing currency deals, meaning spreads are competitive and trades are executed within small timeframes.

The current list of G10 currencies are:

·        United States Dollar (USD)

·        Euro (EUR)

·        Great Britiain Pound Sterling (GBP)

·        Japanese Yen (JPY)

·        Australian Dollar (AUD)

·        New Zealand Dollar (NZD)

·        Canadian Dollar (CAD)

·        Swiss Franc (CHF)

·        Norwegian Krone (NOK)

·        Swedish Krona (SEK)

The Group of Ten, or G10, was founded in 1962 by 10 countries who agreed to participate in the General Arrangements to Borrow (GAB). The GAB was created to provide additional financial resources to the International Monetary Fund (IMF) to tackle balance of payment issues across the globe. Original G10 members included Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom and the United States. In 1964, an 11th country, Switzerland joined the GAB but the name G10 stuck. The GAB enables the IMF to borrow specified amounts of currencies from these eleven countries’ central banks, under certain circumstances.

With the formation of the Eurozone, many of the original G10 countries began using the same currency, the euro, and new, additional currencies were added to the so-called G10 currencies.

The use of G10 currencies

Most of the G 10 currencies are used as reserve currencies, meaning they are a part of the basket of currencies in which most central banks keep their holdings. The use of G10 currencies for this purpose is helped by the fact the almost all the G10 currencies are heavily traded against each other, making them rather liquid in the market. For this reason, as well, many traders and investors will often use G10 currencies as a base for trading other, less commonly traded currencies. When a trader or investor is interested in tracking the value of a particular currency, the trader or investor will typically use a G10 currency as a benchmark due to the ease of access to G10 currency pairs in the marketplace.

A look at G10 currency pairs

A currency pair is a trade between two specific currencies. The stronger currency usually appears as the numerator or “base” currency, while the weaker currency appears as the denominator or “quote” currency in the trade.

Among the G10, you’ll find that most of the currencies have a strong inverse relationship with each other, with the major exception of the USD vs. EUR. These two currencies, which are the world’s two largest reserve currencies tend to be correlated in their market movements.

Some of the major G10 currency pairs traders use include:

·        EUR/USD – The euro against the U.S. dollar

·        USD/JPY – The U.S. dollar against the Japanese yen

·        GBP/CHF – The British pound against the Swiss franc

·        GBP/USD – The British pound against the U.S. dollar

·        EUR/JPY – The euro against the Japanese yen

·        EUR/GBP – The euro against the British pound

·        CAD/JPY – The Canadian dollar against the Japanese yen

·        CHF/CAD – The Canadian dollar against the Swiss franc

·        EUR/CAD – The Canadian dollar against the euro

·        AUD/JPY – The Australian dollar against the Japanese yen

·        AUD/NZD – The Australian dollar against the New Zealand dollar

·        CAD/AUD – The Canadian dollar against the Australian dollar

·        NZD/JPY – The New Zealand dollar against the Japanese yen

·        CAD/NZD –Canadian dollar against the New Zealand dollar

·        CHF/NZD – The Swiss franc against the New Zealand dollar

·        CHF/SEK – The Swiss franc against the Swedish krona

·        CHF/NOK – The Swiss franc against the Norwegian krone

 Forex traders will typically use minor currencies paired with the main reserve currencies among the G10 (i.e. U.S. dollar and euro) as a baseline to determine the value of minor currency to minor currency pairs. For example, the value of the Mexican Peso to the Thai Baht (MXN/THB) is determined by the value of the U.S. Dollar to the Mexican peso (USD/MXN) and the U.S. Dollar to the Thai Baht (USD/THB). This is due to the lack of liquidity in trading minor currencies for minor currencies.

What moves G10 currencies’ value?

The value of some G10 currencies are linked to the price movements of commodities. This is true for the currencies of countries whose economic growth is directly related to a reliance on commodity exports or imports.

For example, the Australian dollar is positively correlated with the price of gold and copper. Australia is the second largest producer of gold and the fourth largest copper producing country, so any changes to the demand for gold or copper can impact the health of its economy

Similarly, the value of the Canadian dollar is linked to the price of a barrel of oil linked because it is a net oil exporter due to the oil production in the Albertan tar sands region. That means a drop in the price of oil will negatively impact  the Canadian economy and the value of the loonie. The Japanese yen is also  linked to oil but in reverse because it is a net oil importer, which means that Japan’s economy benefits from declining oil prices. This relationship can cause exaggerated price movements in the CAD/JPY pairing based on shifts in the price of oil.

Another factor that moves the price of G10 currencies is political instability in other countries leads investors to turn to safe haven currencies like the Japanese yen  and Swiss franc.

Of course, central bank interest rate decisions usually have a significant impact on prices in the foreign currency markets. A hike in interest rates increases the return on investment in the domestic market leading to inflows of foreign capital, which will lead to local currency appreciation. Similarly, a reduction in the interest rate is likely to lead to capital outflows as investors seek better returns abroad, leading to local currency depreciation. Because of this, forex traders track central bank meetings discussions and decisions very closely.

 G10 Currencies vs Non-G10 Currencies

The G10 currencies make up the largest portion of the world’s global currency reserves. Thus, when a country is added to the G10 list of major currencies, it can have a significant impact on the value of the currency, which may, in turn, impact the country’s economy. To gain the respect and trust of other international market participants in order to become a G10 currency, the country must show a strong economy, a well-managed and stable trading environment, and a stable banking system.

However, it’s not a foregone conclusion that G10 currencies will always remain the world’s major reserve currencies.

The Future of the G10

The G10 currencies  have a long history of trading in the markets, as well as being a standard base currency for many of the world’s major financial institutions.

As the world becomes more globalized, the growing importance of G10 currencies grows on the face of things. The G10 currencies are the most commonly traded currencies in the international market and are also the most liquid. As long as the G10 currencies continue to be the world’s most commonly traded currencies, their importance in the global economy is likely to continue. In countries where the local currency suffers from hyperinflation or is otherwise unstable, such as Zimbabwe and Argentina, most significant economic transactions are conducted in G10 currencies. Often, but not exclusively, these transactions are conducted in the U.S. dollar – the world’s primary reserve currency.

However, the weaponization of the U.S. dollar through the U.S. government’s sanctioning of geopolitical rivals, has led to the use of other currencies for the purpose of international trade. Sometimes, the currencies used aren’t even G10 currencies, as has been the case with Russia’s heavy use of the Chinese yuan renminbi and the conduct of massive Russian diamond deals in Indian rupees.  

Nevertheless, G10 currencies still tend to be the most stable and predictable currencies. Trade partners who use these currencies are less worried about being unable to liquidate their investment or cash out their currency pairs if they need to, in comparison to the less liquid and/or less stable currencies.


G10 currencies in a cryptocurrency world

Similarly, the G10 currencies are unlikely to be replaced altogether by entirely new cryptocurrencies in the foreseeable future due to there simply being too many advantages of using the G10 currencies in the markets. They are widely accepted. They have greater liquidity. Transaction costs for them are low – often lower than for cryptocurrencies.

Nevertheless, many central banks have begun experimenting with the concept of central bank digital currency (CBDC). While billions of people already hold digital currency balances with commercial banks, CBDCs represent central bank liabilities held directly by individuals and businesses. This is similar to how physical currency today represents central bank liabilities held by the end-user.

Over 100 central banks are currently exploring the development of CBDCs, according to the IMF blog. The Bahamas, Jamaica and Nigeria have already introduced CBDCs, while China, Brazil, India and G10 central banks from the UK and the eurozone are at the forefront of mainstreaming the concept. This would combine some of the benefits of digital currencies like bitcoin and ether with the financial backing of some of the world’s major central banks. One major benefit would be greater financial inclusion for segments of society that until now did not have access to the formal banking system. Over 1.4 billion people are estimated to be excluded from the formal banking system today, largely living in low and middle-income countries.

CBDC can be designed to replicate some of the desirable properties of cash, as “digital cash.” These include the ability to be used without a bank account, with no or low transaction fees, off-line, and requiring minimal formal identification. As a direct liability of the central bank, a CBDC could also be as trusted and risk free (from a credit-risk perspective) as physical cash.

It's entirely possible that we see the full digitization of G10 currencies as direct liabilities drawing on their respective central banks in the coming decades. However, it is unlikely that these currencies will be replaced by a central bank-backed digital currency in the short-term.

Summing up G10 currencies

To conclude, the G10 currencies were originally defined by central banks that took on additional commitments to fund the activities of the International Monetary Fund. Today, the list of G10 currencies is slightly different but it is still made up of currencies that are widely traded on the open market and often serve as reserves currency holdings in other countries’ central banks. Forex traders often use G10 currency pairs as a baseline to determine the relative value of other currency pairs. If you trade foreign currencies, odds are you will want to monitor the value of at least one G10 currency pair, if not more, to keep abreast of market conditions.