You cannot trade one currency by itself. Whenever you buy a currency, you are selling another. In other, more technical, terms, you are going long in one position and short in the other. If you are a U.S. trader, your base currency is the dollar. When you buy the Euro, you are going long with the Euro and selling the dollar short.
Because currencies are traded in pairs, how one currency performs necessarily affects other currencies. There is a natural give and take that currencies go through as they are bought and sold. In short, the basic premise of supply and demand will affect these currencies throughout the course of the day.
Let’s look at the dollar for example. As more people buy the dollar, demand has increased, and as such, the price of the dollar will increase as other currencies see a decline in their price since their demand has decreased. So as people sell their Euros in order to buy the dollar, the Euro declines in price relative to the dollar.
Now imagine dozens of currencies interacting like this. This tangled web of price comparisons is the Forex market, and it accounts for the majority of the world’s trading at any given time. Currencies are traded back and forth between traders for profit, or out of necessity, as businesses and individuals conduct their affairs with entities in other countries. Some currencies are traded more regularly than others, giving these popular currencies more liquidity. The dollar, the Euro, the British Pound, and the Japanese yen are the most widely traded.