What Is Reciprocal Currency?
In the foreign exchange market, a reciprocal currency is when a currency pair involves the U.S. dollar (USD), but the USD is not the base currency. A reciprocal currency is also quoted as dollars per unit of currency instead of in units of currency per dollar.
The Basics of a Reciprocal Currency
There are currency pairs where the U.S. dollar is the base currency like the USD/JPY or the dollar versus the Japanese yen or the USD/CAD, which is the dollar versus the Canadian dollar.
However, reciprocal currencies are quoted in what's commonly referred to as "European" terms meaning the currency other than the U.S. dollar is the base currency.
Real World Examples of a Reciprocal Currency
The currency pair NZD/USD has the New Zealand dollar as its base currency and the USD as its quote currency. Reciprocal currency describes currency pairs used in the foreign exchange market where the U.S. dollar (USD) and another currency are paired, but where the USD is not the first currency quoted. In other words, one would quote the exchange rate of NZD/USD as the New Zealand dollar versus U.S. dollar.
Major currency pairs that involve the USD but where the USD is not the base currency include EUR/USD (euro to U.S. dollar); GBP/USD (British pound to U.S. dollar); and AUD/USD (Australian dollar to U.S. dollar).
The euro/USD exchange rate is expressed in dollar terms, even though the euro is the base currency. For example, the euro/USD rate might be $1.15 to 1 euro, but when quoting the rate, a trader would say the euro/U.S. rate is $1.15.