Why is currency always quoted in pairs?

By Matt Lee AAA
A:

When reading currency quotes, you have probably noticed that there is only a single quote for a pair of currencies. Currency pairs are quoted as such because a currency is only valuable in relation to another currency. The value of a domestic good in an open market is very easy to determine - just look at the current market price. In this instance, the value of the good is essentially being compared to the currency. Therefore, when quoting the value of a currency, it must also be valued against something else.

When looking at a currency quote, there is only one quoted number after a currency pair. For example, let's examine the currency pair CAD/USD with a quote of 0.9111. Before we can understand what this means, we must first understand how the quote works.

As you can see, the first currency in the pair is the Canadian dollar and the second currency is the U.S. dollar. In this quote, the Canadian dollar is referred to as the base currency, while the U.S. dollar is the quoted currency. In all cases, the base currency will always be worth one unit in relation to the quoted currency, regardless of whether the quote is indirect or direct. In our example, one Canadian dollar is worth 0.9111 U.S. dollars. Another way this currency pair could be quoted is the inverse; the quote for USD/CAD would be 1.0976 (1/0.9111). This quote tell us how many Canadian dollars can be purchased with one U.S. dollar.

As mentioned above, currencies are quoted in pairs because there must be something of value against which to measure them. They are also quoted in pairs because currencies are often exchanged for one another.

To learn more, read A Primer On The Forex Market and Dual And Multiple Exchange Rates.

RELATED FAQS

  1. What is the difference between pips, points, and ticks?

    Learn the differences between points, ticks and pips and how each are used by investors to measure price changes in stocks, ...
  2. What is the difference between extensive margin and intensive margin in economics?

    Find out why it is important for traders to understand the difference between initial margin requirements and maintenance ...
  3. How does the balance of payments impact currency exchange rates?

    Take a brief look at the relationship between a nation's balance of payments and the exchange rate value of its currency ...
  4. How do I use Weighted Alpha to create a forex trading strategy?

    Find out how the concept of weighted alpha can be applied to currency contracts in the foreign exchange market to spot potentially ...
RELATED TERMS
  1. ICE LIBOR

    See LIBOR
  2. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  3. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  4. Open Position Ratio

    The percentage of open positions held for major currency pairs ...
  5. Indirect Quote

    A currency quotation in the foreign exchange markets that expresses ...
  6. Competitive Devaluation

    A series of sudden currency depreciations that nations may resort ...

You May Also Like

Related Articles
  1. Economics

    Who Benefits From South Korea's Lowered ...

  2. Trading Strategies

    Top Day Trading Instruments

  3. Chart Advisor

    Why You Must Watch These Currency ETF ...

  4. Chart Advisor

    Trade A Surging U.S. Dollar With These ...

  5. Fundamental Analysis

    Forex Exotic Currency Trading: Risks ...

Trading Center