What Is American Currency Quotation?
An American currency quotation is a quotation in the foreign exchange markets whereby the value of the American dollar is stated as a per-unit measure of a foreign currency. This type of quotation shows how much U.S. currency it takes to purchase one unit of foreign currency.
- An American currency quotation is how much U.S. currency it takes to buy one unit of foreign currency.
- In a currency pair, the first currency listed is one unit, and the listed rate is how much of the second currency it takes to buy the single unit of the first.
- Currencies are also referred to as direct or indirect quotes, with a direct quote being how much domestic currency it takes to buy one unit of foreign currency.
Understanding American Currency Quotation
For example, an American currency quote would be US$0.85 per C$1. This shows that it will take 0.85 U.S. dollars to purchase a single unit of Canadian currency. To purchase C$1,000, it would cost US$850. The currency pair involved is the CAD/USD.
The opposite of an American currency quotation is a European currency quotation where the foreign currency is the stated per-unit measure of the U.S. dollar. Using the Canadian dollar again as an example, assume a rate of C$1.40 per US$1. This explains that it will take 1.40 Canadian dollars to purchase a single U.S. dollar. In this case, the pair involved flips to the USD/CAD.
In a currency pair, the first currency listed is a single unit, and the attached number or quote shows how much of the second currency it takes to buy that single unit of the first.
Direct and Indirect Quotes
Traders more often refer to quotes as direct or indirect, rather than American or European, although all the terms are used.
A direct quote is how much domestic currency it takes to purchase one unit of foreign currency. The USD/CAD rate, say 1.35, is the direct quote rate in Canada because it shows how many Canadian dollars it takes to buy one U.S. dollar. To someone in the U.S., this would be an indirect quote.
Interpreting an American Quote
American quotes include the EUR/USD, AUD/USD, GBP/USD, and NZD/USD, since these pairs are showing how much USD it takes to buy the first currency listed.
Assume the EUR/USD is trading at 1.1525. The following month it is trading at 1.1960. The pair has moved up in price, which means the EUR has increased in value relative to the USD. It now costs more USD to buy one euro.
Therefore, when looking at a currency price chart, the first currency in the pair is the directional currency. If the rate is rising, the first currency is appreciating relative to the second. If the rate is dropping, the first currency is dropping in value relative to the second.
If the rate drops from 1.1525 to 1.1310, the euro has dropped in value relative to the U.S. dollar.
Example of an American Currency Quotation and Price Change
Assume that the AUD/USD, an American quote, is trading at 0.6845. This means it costs $0.6845 to buy an Australian dollar. The European quotation of this rate would be 1.4609 (1 / 0.6845), which is the USD/AUD rate. This shows how many Australian dollars it takes to buy one U.S. dollar.
On an AUD/USD price chart, if the rate rises to 0.70, the AUD has increased value relative to the USD. If the rate falls to 0.65, the AUD has lost value relative to the USD.
The chart above shows the AUD/USD daily prices. As the rate moves lower, the AUD is losing value (USD rising). The price stabilizes within a price range for a period, but ultimately the price is still making lower swing highs and eventually breaks through the bottom of the range. The break lower signals a weakening AUD versus a stronger USD.
While the AUD is falling, the USD is rising. This would be visible by looking at a USD/AUD chart. Everything would be flipped upside down. When the AUD/USD is falling, the USD/AUD would be rising, and vice versa.