Why is currency always quoted in pairs?

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.

comments powered by Disqus
Trading Center