Base currency
Table of Contents
Base currency
Trading in the foreign exchange market involves buying one currency and selling another in pairs. The base currency is the first of the two currencies in a team, and the quote currency is the second. It evaluates the worth of two coins, i.e., the base currency and the quote currency.
The base currency in forex is the amount of the quoted cash required to buy one unit of the base currency. For instance, if you were looking at the CAD/USD currency pair, the Canadian dollar would be the base currency, and the US dollar would be the quote currency.
What is base currency?
Prices for individual currency units are offered as currency pairs on the forex market. A currency pair quotation always starts with the base currency, the transaction currency, and ends with the quote currency, also known as the counter currency. A company may reflect all gains and losses in its accounting by using the base currency as domestic or accounting currency.
Understanding a base currency
All forex transactions require the simultaneous buying and selling of two different currencies, but the currency pair itself can be viewed as a single instrument that can be bought or sold. You purchase the base currency and sell the quote currency when buying a currency pair from a forex broker.
On the other hand, if you sell the currency pair, you receive the quote currency instead of the base currency. Base currencies are present in currency transactions since a currency pair is constantly exchanged. A trader who purchases US dollars using sterling buys USD and sells GBP.
Currency pairings appeal to businesses that operate abroad and transact in different currencies. The USD/GBP or GBP/USD currency combination is useful for a British company that transacts business in US dollars.
Factors that impact base currency
The following are the factors that impact base currency:
- Currency exchange rates and currency pairs fluctuate due to changes in market inflation. The value of a nation’s currency will rise if its inflation rate is lower than that of another. Where inflation is low, prices of products and services rise more slowly. While a nation with higher inflation normally experiences currency depreciation and higher interest rates, a country with persistently lower inflation typically sees growing currency values.
- Interest rates will likely drop in a recession, making it harder for the nation to attract foreign investment. As a result, its base currency loses purchasing power against the currencies of other countries, which lowers the exchange rate.
- Currency value and the dollar exchange rate are affected by changes in interest rates. Interest rates, foreign exchange rates, and inflation are all interconnected. As higher interest rates provide lenders higher rates, which attracts more foreign money and raises exchange rates, a country’s currency gains value in reaction to increases in interest rates.
- Government debt decreases a nation’s ability to attract foreign investment, which increases inflation. Foreign investors will sell their bonds on the open market if the market anticipates government debt in a particular country. The value of its base currency will consequently decline.
Base currency examples
The idea of the base currency is understood from the following example.
In 2023, Jin has plans for a vacation in New York. He is an English resident who exclusively carries pounds sterling. He thus visits the currency exchange with the intention of converting his GBP to USD. According to the store assistant, the exchange rate is GBP/CAD = 0.82. That indicates that 0.82 GBP is equal to 1 US$.
In our illustration, the quotation currency is GBP, and the base currency is USD. As a result, Johnny may swap £ 0.82 GBP for 1 US$ at the currency exchange.
Working of base currency
In currency trading, you buy the base currency and sell the other. Local changes in interest rates, trade imbalances, and economic expansion can make one currency more preferred. Trading occurs in off-exchange marketplaces and regulated exchanges known as forex (short for “foreign exchange”).
“Pips,” total quotation units, are used for currency pairs. A pip is the fourth digit in a quote following the decimal point and represents.01% of one team of money. Currency pairings have bid-ask prices, just like stocks. The customer pays the required price, and the vendor receives the bid amount. The market maker receives payment for the spread, the difference between the two prices.
Exchanges compete on spread costs to draw customers. The minimum investment for trading is 100,000 units of the base currency, a sizable sum. Yet, the minimum margin needed to trade in cash can be as low as 2%, depending on the currency pair.
Frequently Asked Questions
The quote currency can be defined as the second currency in a currency pair, and it is the one that is quoted with the base currency. For example, in the AUD/USD currency pair, the AUD is the base currency, and the USD is the quote currency. The quote currency is also sometimes referred to as the counter currency. The base currency is also sometimes referred to as the primary currency.
Base Currency Equivalent is the quantity of the pertinent currency needed to acquire the relevant US Dollars at the agent’s spot exchange rate.
A currency pair is a quotation of two distinct currencies, with the two values mentioned. When a currency pair order is made, the first listed currency, the base currency, is purchased, and the second listed currency, the quote currency, is sold. The currency pair EUR/USD is the most liquid globally. The second most recognised currency pair globally is USD/JPY.
Exotic base currencies are those seldom used in international financial transactions and with little volume on foreign currency markets. Exotic currencies are typically from countries with emerging economies or that are considered to be high-risk. They are hence often more volatile than other big currencies. Exotic base currencies are typically less liquid than major currencies, making them more difficult to convert into other currencies.
Base and quote currencies are used to calculate the currency pair’s value and make trading decisions.
Related Terms
- Trailing Stops
- Exchange Control
- Relevant Cost
- Dow Theory
- Hyperdeflation
- Hope Credit
- Futures contracts
- Human capital
- Subrogation
- Qualifying Annuity
- Strategic Alliance
- Probate Court
- Procurement
- Holding company
- Harmonic mean
- Trailing Stops
- Exchange Control
- Relevant Cost
- Dow Theory
- Hyperdeflation
- Hope Credit
- Futures contracts
- Human capital
- Subrogation
- Qualifying Annuity
- Strategic Alliance
- Probate Court
- Procurement
- Holding company
- Harmonic mean
- Income protection insurance
- Recession
- Savings Ratios
- Pump and dump
- Total Debt Servicing Ratio
- Debt to Asset Ratio
- Liquid Assets to Net Worth Ratio
- Liquidity Ratio
- Personal financial ratios
- T-bills
- Payroll deduction plan
- Operating expenses
- Demand elasticity
- Deferred compensation
- Conflict theory
- Acid-test ratio
- Withholding Tax
- Benchmark index
- Double Taxation Relief
- Debtor Risk
- Securitization
- Yield on Distribution
- Currency Swap
- Overcollateralization
- Efficient Frontier
- Listing Rules
- Green Shoe Options
- Accrued Interest
- Market Order
- Accrued Expenses
- Target Leverage Ratio
- Acceptance Credit
- Balloon Interest
- Abridged Prospectus
- Data Tagging
- Perpetuity
- Optimal portfolio
- Hybrid annuity
- Investor fallout
- Intermediated market
- Information-less trades
- Back Months
- Adjusted Futures Price
- Expected maturity date
- Excess spread
- Quantitative tightening
- Accreted Value
- Equity Clawback
- Soft Dollar Broker
- Stagnation
- Replenishment
- Decoupling
- Holding period
- Regression analysis
- Wealth manager
- Financial plan
- Adequacy of coverage
- Actual market
- Credit risk
- Insurance
- Financial independence
- Annual report
- Financial management
- Ageing schedule
- Global indices
- Folio number
- Accrual basis
- Liquidity risk
- Quick Ratio
- Unearned Income
- Sustainability
- Value at Risk
- Vertical Financial Analysis
- Residual maturity
- Operating Margin
- Trust deed
- Leverage
- Profit and Loss Statement
- Junior Market
- Affinity fraud
- Working capital
- Individual Savings Account
- Redemption yield
- Net profit margin
- Fringe benefits
- Fiscal policy
- Escrow
- Externality
- Multi-level marketing
- Joint tenancy
- Liquidity coverage ratio
- Hurdle rate
- Kiddie tax
- Giffen Goods
- Keynesian economics
- EBITA
- Risk Tolerance
- Disbursement
- Bayes’ Theorem
- Amalgamation
- Adverse selection
- Contribution Margin
- Accounting Equation
- Value chain
- Gross Income
- Net present value
- Liability
- Leverage ratio
- Inventory turnover
- Gross margin
- Collateral
- Being Bearish
- Being Bullish
- Commodity
- Exchange rate
- Basis point
- Inception date
- Riskometer
- Trigger Option
- Zeta model
- Racketeering
- Market Indexes
- Short Selling
- Quartile rank
- Defeasance
- Cut-off-time
- Business-to-Consumer
- Bankruptcy
- Acquisition
- Turnover Ratio
- Indexation
- Fiduciary responsibility
- Benchmark
- Pegging
- Illiquidity
- Backwardation
- Backup Withholding
- Buyout
- Beneficial owner
- Contingent deferred sales charge
- Exchange privilege
- Asset allocation
- Maturity distribution
- Letter of Intent
- Emerging Markets
- Consensus Estimate
- Cash Settlement
- Cash Flow
- Capital Lease Obligations
- Book-to-Bill-Ratio
- Capital Gains or Losses
- Balance Sheet
- Capital Lease
Most Popular Terms
Other Terms
- Jumbo pools
- Inverse floater
- Forward Swap
- Underwriting risk
- Reinvestment risk
- Final Maturity Date
- Payment Date
- Secondary Market
- Margin Requirement
- Mark-to-market
- Pledged Asset
- Yield Pickup
- Subordinated Debt
- Treasury Stock Method
- Stochastic Oscillator
- Bullet Bonds
- Basket Trade
- Contrarian Strategy
- Notional Value
- Speculation
- Stub
- Trading Volume
- Going Long
- Pink sheet stocks
- Rand cost averaging
- Sustainable investment
- Stop-limit sell order
- Economic Bubble
- Ask Price
- Constant prepayment rate
- Covenants
- Stock symbol
- Companion tranche
- Synthetic replication
- Bourse
- Beneficiary
- Witching Hour
- Widow and Orphan stock
- Public Float
- Closing Price
- Reverse stock splits
- Quiet period
- Prepayment risk
- Interpolation
- Homemade leverage
- Prime bank investments
- Purchasing power
- ESG
- Capitulation
- Intrapreneur
Know More about
Tools/Educational Resources
Markets Offered by POEMS
Read the Latest Market Journal
How to soar higher with Positive Carry!
As US Fed interest rates are predicted to rise 6 times this year, it’s best...
Why 2024 Offers A Small Window of Opportunity and How to Position Yourself to Capture It
With the Federal Reserve (FED) finally indicating rate cuts in 2024, we witnessed a significant...
Weekly Updates 25/3/24 – 29/3/24
This weekly update is designed to help you stay informed and relate economic and company...
Weekly Updates 18/3/24 – 22/3/24
This weekly update is designed to help you stay informed and relate economic and company...
The Rise of AI – Top traded AI counters in February 2024
Start trading on POEMS! Open a free account here! At a glance: Record highs for...
Playing Defence: Diversification in Forex Trading
Introduction In our ever-evolving financial world, Forex trading has emerged as a popular trading vehicle...
Demystifying Forex Trading – Technical Analysis
In the world of financial markets, the Forex market stands out as the largest, most...
Demystifying Forex Trading: Fundamental Analysis
In the world of financial markets, the Forex market stands out as the largest, most...