Reading FX exchange rates
A currency’s value is determined by its worth compared to another currency. The first currency in a pair is called the base currency. The second is called the terms, quote or counter currency. A pairing shows how much of the counter currency is needed to purchase one unit of the base currency. For example, EUR/USD 1.2500 means you would need US$1.25 to buy one euro. Conversely, if you sell one euro, you would get US$1.25.
Major and minor currencies
There are seven “major” currency pairings in the FX market, all of which involve the US dollar. The other six major currencies are the euro, Japanese yen, British pound, Australian dollar, Canadian dollar, and Swiss franc. These are the currencies that are most actively traded. As a result, they also tend to be the most cost-effective to trade, since the spread between their buy and sell prices is usually slimmer than in the case of minor currencies.
Minor currencies are generally thought of as most other currency pairs and cross-currencies—such as the Euro vs. the Australian dollar or even the New Zealand dollar vs. the US dollar. A subset of minor currencies is referred to as exotic currencies. These are unusual crosses such as the dollar versus the Thai baht or Turkish lira. Minor and exotic currencies can be more expensive to trade, since as a general rule, the fewer participants who trade a given currency, the more costly it becomes.
All currencies have three-letter codes. The table below shows the codes for some of the more commonly traded ones. To find out codes for lesser-used currencies, try searching online using keywords like “currency conversion.”
|United Kingdom||British Pound||GBP|
The price of a currency is called a quote. There are two different types of quotes in the FX market: direct and indirect. Both involve the US dollar. The difference is whether the US dollar is the base or the counter currency.
Most currencies are traded directly against the US dollar. The market rates that are expressed for such currency pairs are called direct rates. In most cases, the US dollar is the base currency pair, and the currency quote is expressed as a certain number of units per 1 USD. For example, USD/CAD=1.4500 would mean that 1 USD= 1.4500 CAD.
For some currency pairs, the US dollar is not the base currency, but the counter or quote currency. The market rates that are expressed for such currency pairs are called indirect rates. This is the case with the British pound (GBP), New Zealand dollar (NZD), euro (EUR) and Australian dollar (AUD). For example, GBP/USD=1.5800 would indicate that 1 GBP (British pound)= 1.5800 USD.
When one currency is traded against any currency other than the USD, the market rate for this currency pair is called a cross rate. In other words, cross rate is the exchange rate between two currencies not involving the US dollar. Although US dollar rates do not appear in the final cross rate, they are usually used in the calculation, and so must be known. Trading between two non-US dollar currencies usually occurs by first trading one of them against the US dollar and then trading the US dollar against the second non-USD currency. There are a few non-USD currencies that are traded directly, such as GBP/EUR or EUR/CHF.