The quote currency, also called the “counter currency,” is the second currency in a currency pair. It helps determine the value of the base currency. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency.
Understanding how currencies are quoted and priced is crucial for investors trading in the forex market. Market makers typically trade specific currency pairs directly or indirectly.
In a direct quote, the quote currency is the foreign currency, while in an indirect quote, the quote currency is the domestic currency. This distinction helps investors determine how much of the quote currency they need to sell to buy one unit of the base currency.
When the rate in a currency pair rises, the value of the quote currency decreases, regardless of whether the pair is direct or indirect. Most currency pairs involving the U.S. dollar (USD) have USD as the base currency. If the USD isn’t the base, it’s considered a reciprocal currency.
Let’s say a trader wants to buy £400 using U.S. dollars (USD). They’ll need to trade using the GBP/USD currency pair. To make this trade, they must determine how many USD (the quote currency) they need to sell to get £400.
If, by the end of the trading day, the exchange rate for the pair is 1.4103, it means the trader needs to spend $1.4103 to buy £1. So, to complete the transaction that day, the trader has to sell 564.12 units of the quote currency to get 400 units of the base currency. In other words, they’ll need $564.12 for £400, calculated as (400 x 1.4103).
In the USD/CAD currency pair, the USD is the base currency, and the CAD is the quote currency. When the USD/CAD pair is quoted at $1.3300, it means that you need to pay 1.3300 Canadian dollars to buy one U.S. Dollar.
Most currency exchange rates are compared against the U.S. Dollar, which is considered the world’s reserve currency. However, when traders or investors want to exchange one foreign currency directly for another foreign currency without involving the U.S. Dollar, they use what’s called cross rates.
For instance, let’s consider the USD/CAD cross rate, which is a direct quote. In this scenario, the CAD is the quote currency, while the USD is the base currency. The value of one USD is determined in terms of the CAD. From a U.S. perspective, the CAD is seen as a foreign currency.
Now, let’s look at the EUR/USD cross rate, which is an indirect quote. Here, the EUR is the base currency, and the USD is the quote currency. The value of one EUR is determined in terms of the USD. In this case, the USD is considered the domestic currency.
Currency pairs, like EUR/USD or USD/JPY, are influenced by different things like how well economies are doing, decisions made by central banks, and interest rates. Major currencies such as the euro and the USD are usually the main currency rather than the secondary one when dealing with unusual currencies.
In 2024, the most traded currency pairs were:
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- AUD/USD (Australian Dollar/US Dollar)
- USD/CAD (US Dollar/Canadian Dollar)
- USD/CNY (US Dollar/Chinese Yuan)
- USD/CHF (US Dollar/Swiss Franc)
- EUR/JPY (Euro/Japanese Yen)
- EUR/GBP (Euro/British Pound)
- USD/KSH (US Dollar/Kenya Shilling)
- NZD/USD (New Zealand Dollar/US Dollar)
In these pairs, the first currency is the main one, and the second one is the secondary. For example, in GBP/USD, the pound is the main one that’s bought, while the dollar is the secondary one that’s sold.
The Bottom Line
On the foreign exchange market (FOREX), currencies are traded. There are two currencies in a currency pair: the base currency and the quote currency. The quote currency comes second in both direct and indirect pairs. It helps determine the value of the base currency. For instance, EUR/USD is a common pair. When you see currency quotes, they tell you how many units of the quote currency you need to trade for one unit of the base currency.
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