When trading forex, a trader has the option to trade both long (buy) and short (sell) positions. As the rate in a currency pair increases, the value of the quote currency decreases. In both examples, the base currency (Euro) serves as the focal point for the transaction, dictating how much of the quote currency (U.S. Dollar) is needed for the exchange. While the concept is essential in the Forex market, its influence extends beyond trading. Knowing the base currency is vital for businesses dealing in multiple countries, or for travellers who need to exchange money. In foreign exchange trading, currencies are not treated as singular entities but are always part of a pair.

The exchange rate between two currencies directly correlates with the concept of base and quote currencies. If the exchange rate for EUR/USD is listed as 2.15, this means that 1 Euro can be exchanged for 2.15 US Dollars. Trading is done on regulated exchanges called Forex (short for “foreign exchange”) and off-exchange markets.

• For example, in the EUR/USD pair, EUR is the base currency and USD is the quote currency.
• Some may also have a preferred currency that they always use as a base currency.
• This analysis helps traders make informed decisions about when to buy or sell a currency pair to maximize profits.
• The US dollar can be either the base currency or the quote currency; for example, in USD/JPY, it’s the base currency.
• So, the number of pips in the EURUSD quote we mentioned above is 89 (not 91, which are the fourth and fifth numbers after the decimal point).

By understanding how base and quote currencies work, traders can analyze currency pair behavior more accurately and make informed decisions about when to buy or sell. Forex assets are sold in pairs like the USD/GBP, the USD/CAD, and the USD/CHF. The first currency in the pair is the base currency, while the second is the quote currency. Forex currency pairs show how much of a quote currency traders need to sell to buy one unit of the base currency.

TRY/USD (Turkish lira/US dollar) qualifies as an exotic currency pair. Cross-currency pairs are currency pairs that do not feature the US dollar. This type of currency pair may also be included in the ‘minor’ category. One example of a cross-currency pair is GBP/JPY (British pound/Japanese yen). A trader will still buy or sell US dollars in this instance because you’re always looking at the base currency when opening a trade because the base currency acts as the anchor point for the two currencies.

Here, the base currency (Euro) serves as the standard against which the quote currency (U.S. Dollar) is measured. The concept of a base currency is best understood through a practical example. Let’s consider the currency pair EUR/USD, which includes the Euro (EUR) and the United States Dollar (USD).

Is USD always the base currency?

The base currency serves as a reference point for evaluating exchange rates, while the quote currency indicates how much of it is needed to purchase one unit of the base currency. Mastering these concepts enhances traders’ ability to interpret market movements and execute informed trades effectively. In the foreign exchange (forex) market, currency unit prices are quoted as currency pairs. The base currency is normally considered the domestic currency and is followed by the quote currency, also known as the counter currency, in the pair. In the forex market, currency pairs are commonly depicted as XXX/YYY where the XXX is the base currency. Fiat or national currency pairs are often traded on the international foreign exchange market known as the forex market.

Understanding the base currency could be essential to forex traders because it determines their perception of a currency pair’s overall value. The quote currency, the second in the pair, base currency and quote currency is used to value the base currency. For example, in the EUR/USD pair, EUR is the base currency and USD is the quote currency.

This is one of the few cases where, although the base currency has never been stronger than the quoted currency, the traders themselves have decided how this pair will be traded in forex. When euro trading started in early 1999, both EURGBP and GBPEUR were available on Reuters or EBS terminals, but eventually the EURGBP pair used today took over. Base currency and quote currency are two common expressions in the Forex (foreign exchange) market. A currency pair is the quotation of the relative value of one currency against the other.

Before your trip, you check the exchange rate and see that EUR/USD is at 1.2. If you’ve ever tried to demo trade, you’ll find out that your trades are always starting out on the negative. As soon as you click that “Buy” or “Sell” button, you’re already on the negative. If you have received this message in error, please contact our support team at

Q: What is the difference between base currency and quote currency?

• For accounting purposes, a firm may use the base currency as the domestic currency or accounting currency to represent all profits and losses.
• The answer is actually very simple, it is due to conventions and in principle there is no precise rule by which currency quotes in forex are determined.
• Here, the US dollar is the stronger currency, yet it is listed as the second most valuable currency (however, in the early days of forex in the 1970s, both AUD and NZD were more valuable than the dollar).
• In a currency pair, such as EUR/USD, EUR (Euro) is the base currency and USD (United States Dollar) is the quote currency.

Currency pairs are used because you are always selling one currency and buying the other. The base currency is the first currency listed in a currency pair, such as USD/EUR (where the U.S. dollar is the base currency). If you are “long” the currency pair, you expect the base currency to rise in terms of the quote/counter currency. In the forex market, currency unit prices are quoted as currency pairs. In Forex trading, a currency pair is the quotation of two different currencies, where the value of one currency is quoted against the other.

The markets are moving.

For example, if you were looking at the currency pair AUD/USD, the US dollar is the quoted currency, and the price listed under this currency states how much US dollar is needed to buy one Australian dollar. Macroeconomic factors affect the exchange rate of base currencies as well as quote currencies. Various economic indicators, such as inflation rates, employment data, GDP growth, and the interest rate of a country, can significantly impact a currency pair’s value. The base currency plays an instrumental role in establishing the exchange rate value of a currency pair while helping traders analyse the market to potentially execute trades successfully. A currency pair’s exchange rate reflects how much of the quote currency is needed to buy (or sell) one unit of the base currency. If you’re interested in putting your understanding of base currency to the test, consider trading on markets.com, a leading Forex CFD trading platform.

What are base and quote currencies used for?

It now wants to invest in its expansion there and purchase a warehouse. The warehouse currently costs $100,000, so the company looks at the USD/GBP currency pair to see how many British pounds sterling it needs to allocate to this investment. If this investor looks at the exchange rate for GBPUSD, he sees how many US dollars he can buy for a certain amount of GBP. If he knows the correlations and influences on the exchange rate, he can make estimates as to whether the exchange rate will rise or fall in the near future and manage his investment in this way. Understanding the differences between these groups is key to managing your risk and exposure in Forex trading. The major pairs tend to be more liquid and volatile, while exotic pairs can offer higher potential returns but come with greater risks.

Trading Strategies Involving Base Currency and Quote Currency

Base currency and quote currency play a crucial role in determining the value of a currency pair and calculating profits and losses in forex trading. The exchange rate of a currency pair represents how much of the quote currency is needed to purchase one unit of the base currency. For example, if the EUR/USD exchange rate is 1.20, it means that 1 euro can be exchanged for 1.20 US dollars. In Forex trading, currency pairs form the foundation of every transaction. Understanding how currency pairs work—including concepts like base and quote currency—is crucial for every trader. This guide will walk you through the essential elements of currency pairs, from their structure to how exchange rates influence trading outcomes.

Now, if it were to move towards 1.3500, the euro’s value would increase, and the US dollar’s value would decrease, meaning you’d need more US dollars to buy one euro. As previously mentioned, currencies in the forex market are always traded in pairs, and you can’t have a base currency without a quote currency. For the most part, traders will end up trading the major currency pairs rather than the minors or exotics, mainly due to the high liquidity the major currency pairs offer. Even though these currency pairs are still popular among many traders, they see less liquidity than the major currency pairs since they don’t include the US dollar. The market maker earns the spread, or difference between the two prices.

But some of them have as little as 0.6pips spread on major currency pairs. The USD is the most traded currency on the forex market, and therefore one would expect the US currency to be the top currency in most pairs. However, the position of currencies in a currency pair is not determined by the liquidity of the currency or its strength. The truth is that the USD is often listed as the base currency in pairs involving less-traded or exotic currencies, and its value tends to be higher in these cases.

If he expects the price to rise, he buys USD and can sell them again at a later date when the price has risen, thus making a profit. It’s important to note that the concept of a “high” or “low” currency value is always relative to another currency.

For example, for the currency pair JPY/USD, the Japanese yen is the base, and the US dollar is the quote currency. Simply visit the Overview of the Forex Market if you want to explore the Basics of Trading. Learn the basics to understand base and quote currencies to interpret market movements and make informed trading decisions. A company can watch the exchange rate of their local currency against another country’s currency, where business is conducted to calculate how much they’ll need to charge for their products or services. The direct quote in the United States for this pair might look like 1.2, indicating that 1 Euro can be exchanged for 1.2 U.S.