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. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  2. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  3. What happens to the US dollar during a trade deficit?

    During a trade deficit, the U.S. dollar generally weakens. Of course, there are numerous inputs that determine currency movements ... Read Full Answer >>
  4. Where did the term 'pip' in currency exchange come from?

    The term pip is an acronym for percentage in point or price interest point. It measures a unit of change within a pair of ... Read Full Answer >>
  5. How do changes in national interest rates affect a currency's value and exchange ...

    All other factors being equal, higher interest rates in a country increase the value of that country's currency relative ... Read Full Answer >>
  6. What is the difference between pips, points, and ticks?

    Point, tick and pip are terms used to describe price changes in the stock market and other markets. While traders and analysts ... Read Full Answer >>
Related Articles
  1. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  2. Budgeting

    Is Living in Europe Cheaper than in America?

    Learn how living in Europe has financial advantages over living in the United States. Discover the benefits to take advantage of when it makes financial sense.
  3. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  4. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  5. Forex Fundamentals

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  6. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  7. Stock Analysis

    3 Predictions for U.S. Stocks in 2016

    Read about predictions for the stock market in 2016. See how the energy sector and the biotech sector may be under pressure in the new year.
  8. Forex

    How 2016 Could Be A Disaster for These Currencies

    Tanking oil prices, slowing BRIC growth, and general instability do not bode well for these currencies.
  9. Term

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  10. Mutual Funds & ETFs

    3 ETF Strategies for Growth in Europe for 2016 (FXEU, DFE)

    Learn about the outlook for European economies and how European equities could be poised for a more prosperous 2016 than U.S. equities.
RELATED TERMS
  1. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  2. Currency

    Currency is a generally accepted form of money, including coins ...
  3. Sprexit

    Sprexit, or SPanish euRo exit, is the possible case of Spain ...
  4. Grexit

    Grexit, an abbreviation for "Greek exit," refers to Greece's ...
  5. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  6. Eurogroup

    Eurogroup is an informal, meeting of the finance ministers of ...
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center