EUR/USD currency pair represents the euro versus the U.S. dollar and is different than most others because the dollar is the denominator or quote currency. Other currency pairs involving the U.S. dollar typically include the dollar as the numerator or base currency. As a result, when the dollar strengthens against the euro, EUR/USD moves lower, and during periods of dollar weakness (vs. the euro), the pair increases in value.
Understanding Currency Pairs
In a currency pair, the first currency is called the base currency, and the second is called the quote currency. Currency pairs can also 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.
- EUR/USD is the euro versus dollar currency pair.
- A currency pair is a fraction that includes a numerator and a denominator, which are also called the base currency and quote currency.
- While most currency pairs that quote the dollar list the dollar as the numerator or base currency, EUR/USD has the euro first and the reason is mostly due to convention.
- The euro was introduced as an accounting currency in 1999 and is the second most active currency behind the U.S. dollar.
- Despite its unconventional format, EUR/USD is the most actively traded currency pair in the world.
The way currency pairs are quoted can 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. Most pairs using the U.S. dollar are direct quotes.
However, for an American trader, a EUR/USD quote is an indirect one. So, for example, a quote of 0.80 EUR/USD means that 1 EUR would cost you $0.80. If the pair appreciates to 1.00, the euro has increased in value because it now costs $1 to buy a euro. On the other hand, if the pair is quoted .75, the dollar is seeing strength because it now costs just $0.75 to buy a euro.
Euro vs. Dollar
The euro currency originated because of the Maastricht Treaty in 1992 and was introduced as an accounting currency in 1999. The euro began circulating in countries of the European Union on Jan. 2002 and, over the years, replaced the currencies of most member nations. The euro has become the second most active currency in the world behind the U.S. dollar and the EUR/USD pair sees the most trading in the world of currency pairs trading.
Even though nearly 89% of the currency trades made around the world involve the U.S. dollar and the majority of pairs list the dollar first, 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.