What does “Base Currency” mean?
Prices of individual currencies on the foreign exchange market are always stated as pairs.
A currency pair quotation consists of two parts: the first component, called the base currency (also called the transaction currency), and the second half, called the quote currency (also called the counter currency).
The base currency may be used as the firm’s domestic currency or accounting currency to record financial results.
Conceptualising the Currency of Issue
In foreign exchange, the base currency indicates how many units of the quote currency are required to purchase one unit of the base currency.
The Canadian dollar is the base currency and the United States dollar is the quote currency in the CAD/USD currency pair.
Currency abbreviations must adhere to ISO standards, which are set forth by the International Organisation for Standardisation.
ISO 4217 provides these codes for use in various contexts. These three-letter symbols are used in currency pairs to indicate a particular currency.
A slash (/) is sometimes used to denote the separation between the two currencies that make up a currency pair.
The slash can be absent, substituted by a period or dash, or left as is.
Major currency symbols include USD (U.S. dollar), EUR (Euro), JPY (Japanese yen), GBP (Great Britain pound), AUD (Australian dollar), CAD (Canada dollar), and CHF (Swiss franc).
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Currency pair components
Currency pairs in foreign exchange are written as XXX/YYY or often just XXXYYY. The XXX in this case is the quote currency, while the YYY is the base currency.
These forms include the likes of the British Pound Australian Dollar, Euro US Dollar, Japanese Yen, British Pound New Zealand Dollar, and Euro Swiss Franc.
Currency pairs show the ratio of the quote currency to the base currency when an exchange rate is provided.
If you see EUR/USD = 1.55, for instance, you know that 1 Euro is currently worth 1.55 US Dollars. One might infer from this that the asking price for _1 is $1.55.
When selling the base currency, the currency pair quotation is read in the same way as when buying. One can sell _1 for $1.55 if the seller so chooses.
Simultaneous Actions
Investors in the foreign exchange market typically purchase and sell currencies at the same time, hence quotes are always given in pairs.
When one invests in EUR/USD, for instance, that investor is effectively purchasing Euros and selling Dollars.
Traders purchase the pair when they anticipate a rise in the base currency relative to the quote currency.
Conversely, if they anticipate a decline in the value of the base currency relative to the quote currency, they will sell the pair.
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