In a currency pair, the first currency in the pair is called the base currency and the second is called the quote currency.

Currency pairs can be separated into two types, direct and indirect. In a direct quote the domestic currency is the base currency, while the foreign currency is the quote currency. An indirect quote is just the opposite: the foreign currency is the base currency and the domestic currency is the quote currency. For an American trader, the EUR/USD quote is an indirect one. So, for example, a quote of 0.80 EUR/USD would mean that it takes 0.80 euros to purchase US$1.

Although nearly 89% of the currency trades made around the world involve the U.S. dollar, the EUR/USD currency pair is always quoted indirectly. The reason for this is mostly convention. A EUR/USD quote could easily be shown as USD/EUR by making a simple calculation, but there are no strict rules that determine whether a currency pair is shown directly or indirectly. The way currency pairs are quoted can also vary depending on the country in which the trader lives - most countries use direct quotes, while the U.K., Australia, New Zealand and Canada prefer indirect quotes.

To learn more, see Forces Behind Exchange Rates, Common Questions About Currency Trading and Make The Currency Cross Your Boss.

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