A:

All currencies are traded in pairs. The first currency in the pair is called the base currency while the second is called the quote or "counterpart" currency. Usually the most dominant currency, in terms of the other currencies against which it trades, is quoted first. This is a matter of perspective because, from a local point of view, the local currency is the most dominant. One always wants to know just how much of the foreign currency one can get when exchanging the local currency. An American may want to know how many euros he can get for his dollar or, if he was traveling to Japan, how many yen he can get. (Interested in forex but don't know where to start? Check out Top 7 Questions About Currency Trading Answered.)

However, based on international convention among banks, certain currencies have been assigned trading dominance. The euro represents some 17 countries that have joined the euro system and, therefore, has become the dominant base currency against all other global currencies, so it is quoted first. For example, the euro, represented as EUR, will be identified as EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD, etc. All have the EUR acronym as the first currency in the sequence.

The British pound, originally the main currency of the world during the heights of the British Empire, is next in the hierarchy of currency name domination. The major currency pairs versus the GBP are identified as GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD. Apart from the EUR/GBP, the GBP is usually the first currency quoted when it is involved in a currency pair. Because the U.S. dollar is the de facto world reserve currency since the end of the Second World War, and because commodity prices such as gold and oil are quoted in dollars, one could argue that the dollar is really the dominant currency of the world. In terms of convention, however, it ranks third in dominance and is quoted first against the Canadian dollar, Japanese yen and Swiss franc. In short, tradition and convention seem to play larger roles in the hierarchy of currency pairs than the relative economic strength of the economies that the currencies represent.(For further reading, see Using Currency Correlations To Your Advantage.)

RELATED FAQS
  1. Why isn't the EUR/USD currency pair quoted as USD/EUR?

    In a currency pair, the first currency in the pair is called the base currency and the second is called the quote currency. ... Read Answer >>
  2. 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 ... Read Answer >>
  3. Is there a world currency? If so, what is it?

    There is no such thing as a world currency. However, since World War II, the dominant or reserve currency of the world has ... Read Answer >>
  4. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ... Read Answer >>
  5. What is the value of one pip and why are they different between currency pairs?

    In forex markets, currency trading is done on some of the world's most powerful currencies. The major currencies traded are ... Read Answer >>
  6. How can I trade in cross currency pairs if my forex account is denominated in U.S. ...

    The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is ... Read Answer >>
Related Articles
  1. Trading

    Forex Tutorial: Reading a Forex Quote and Understanding the Jargon

    One of the biggest sources of confusion for those new to the currency market is the standard for quoting currencies. In this section, we'll go over currency quotations and how they work in currency ...
  2. Trading

    What is an Indirect Quote?

    An indirect quote expresses the amount of foreign currency required to buy or sell one unit of the domestic currency in the foreign exchange markets.
  3. Trading

    4 Of The Most Popular Traded Currencies

    Every day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
  4. Trading

    How Do You Make Money Trading Money?

    Making money in the foreign exchange market is a speculative process. You are betting that the value of one currency will increase relative to another.
  5. Trading

    The 6 Most-Traded Currencies And Why They're So Popular

    Every currency has specific features that affect its underlying value and price movements in the forex market.
  6. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  7. Trading

    Understanding The Spread in Retail Currency Exchange Rates

    Understanding how exchange rates are calculated and shopping around for the best rates may mitigate the effect of wide spreads in the retail forex market.
  8. Trading

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
  9. ETFs & Mutual Funds

    Profit From Forex With Currency ETFs

    There's always a bull market somewhere - and now you can find it with currency ETFs.
  10. Trading

    What is a Direct Quote?

    A direct quote uses variable amounts of the home country’s currency to compare to a fixed amount of a foreign currency.
RELATED TERMS
  1. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  2. Quote Currency

    The second currency quoted in a currency pair in forex. In a ...
  3. Reciprocal Currency

    In the foreign exchange market, a currency pair that involves ...
  4. Base Currency

    The first currency quoted in a currency pair on forex. It is ...
  5. Counter Currency

    The currency used as the reference or second currency in a currency ...
  6. Currency

    Currency is a generally accepted form of money, including coins ...
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center