What Are European Terms?
European terms are a way to quote currency exchange rates where the USD is always the base currency. It is an alternative to American terms, or direct terms, for forex quotations that refers to how much of a foreign currency is needed to buy one U.S. dollar.
- European terms refer to a foreign currency exchange quotation in terms of the amount of a foreign currency needed to buy one U.S. dollar, and so USD is always the base currency.
- European terms is a type of indirect quote involving U.S. dollars.
- In forex markets, traders should be aware that the futures market and the spot market often quote currency pairs in different terms, i.e. American terms versus European terms.
Understanding European Terms
When quoting currency pairs in the forex market, prices are established using the base currency and the quote currency (also known as the terms or counter currency). Currency pairs can be represented as the following: base currency/quote currency, or for example, USD/EUR. This is known as a direct quote. In European terms, the USD is always placed in the base currency position, meaning how much of a foreign currency is needed to buy one U.S. dollar. This is a type of indirect quote.
For example, assume there is a bid quote of USD/EUR at 1.3446 and an ask quote of USD/EUR at 1.3448. From the United States perspective, these quotes are given in European terms. The first would signify that the maximum a buyer is willing to pay for one U.S. dollar is 1.3446 Euros, whereas the second represents the minimum a seller is willing to receive for one dollar. In this case, 1.3448 Euros.
Regardless of the quoting convention, when you buy a currency pair you are buying the base currency and selling the term currency. Conversely, when you sell a currency pair you are selling the base currency and buying the term currency.
Foreign Exchange Trading and European Terms
Foreign exchange is the trading of foreign currencies. The foreign exchange market is the largest, most liquid market in the world. Traders can make a profit on exchanging currencies the same way they would by trading other assets. Buying a currency low and selling it high is the same goal as other investments when seeking positive returns.
When trading in foreign exchange, it is crucial for investors to understand the currency terms being represented. When trading currencies against USD, the currency is reported in either American terms or European terms, per standard practice.
For example, the Swiss franc (CHF) trades in European terms in the spot market. The currency pair is represented as USD/CHF. On the other hand, the British pound (GBP) trades in American terms on the futures market. It is represented as GBP/USD. Oftentimes the quote convention for futures is different than spot, and this is important for traders to know so that they are aware of the correct direction of their trade.