Currency refers to any form of money when it is actually in use or circulation. In the market, currencies are always traded in pairs.
A currency’s convertibility plays a major role in determining its standing in the market. Convertibility refers to the ability of an individual, corporation, or government to convert one currency to another without a central bank or any government intervention. The US Dollar stands as one of the most traded currencies in the market because it is easily convertible. There are 3 types of convertibility: fully convertible, partially convertible, and nonconvertible.
Fully convertible currencies, including the US Dollar as well as the Japanese Yen, have no restrictions or limitations on the amount that can be traded. Also, the government does not impose a fixed value or minimum value on the currency.
A partially convertible currency, like the Indian Rupee, is controlled by the central banks that are in charge of international investments, meaning there are restrictions on international investments in that currency. Converting partially convertible currencies requires special approval.
Nonconvertible currencies, like the North Korean Won, are blocked currencies. This means that they do not participate in the markets nor are conversions of these currencies by individuals or corporations permitted.
Currencies are popularly traded because of their high liquidity and their ability to be traded 24 hours a day, excluding weekends. These factors, as well as their vast geological dispersion and fluctuating exchange rates, make currencies a unique and desirable trade item.