Base vs Quote currency: What do they mean in forex trading?

If you’ve tried forex trading before, you’ve heard the terms base currency and quote currency.

So how much do you know about the differences between them? Let’s find out in this article.

Base currency vs quote currency

The base currency is the first currency in a currency pair. It shows how much of the quote currency you need to get one unit of the base currency.

For example, for the currency pair JPY/USD, the Japanese yen is the base, and the US dollar is the quote currency. The value of the base currency is always 1.

The quote currency (also known as counter currency) is the second one in a currency pair. It helps assess the value of the base currency.

Currency quotes tell you how much of the quote currency is needed to exchange for one unit of the base currency.

What is an example of a base currency?

As mentioned, a base currency is the first currency in any currency pair in forex trading representing the traded currency. The second currency in the pair is the quote currency.

Currencies are always quoted in pairs because we’re trading one country’s currency for another.

For example, in EUR/USD, the Euro is the base currency, and you can buy 1 EUR by paying USD 1.1.

An exchange rate attached to a currency pair indicates how much of the quote currency is needed to buy a single unit of the aforementioned base currency.

For example, if EUR/USD = 2.15, it means that 1 EUR is equivalent to 2.15 USD.

What does base vs local currency mean?

When viewing or receiving a direct quote, the base currency = foreign currency. Likewise, the local currency in a pair is the quote currency.

Is the USD always the base currency?

No, the USD may not always be the base currency. While the USD is a commonly used base currency in many currency pairs, it's not an absolute rule. The base currency can vary depending on the currency pair you're looking at.

For instance, in the EUR/USD pair, the base currency is the Euro (EUR), and the US dollar (USD) is the quote currency. The choice of base and quote currencies depends on the convention and the pair being traded.

What happens when the base currency is high?

When the base currency is high, it means that the value of the base currency has increased relative to the quote currency.

This could have several implications:

Strong base currency: This typically indicates that the base currency is strong compared to the quote currency. This could be due to positive economic indicators, higher interest rates, or other factors that make the base currency more attractive to traders.

Exchange rate impact: This means that you would need more of the quote currency to buy one unit of the base currency. This could lead to a decrease in the value of the currency pair. This makes exports from the base currency’s country potentially more expensive, and imports cheaper.

Trading and investing: For traders and investors, a strong base currency might offer favourable opportunities. If the base currency continues to strengthen, it could mean potentially higher returns when converting to the quote currency.

Economic factors: A high base currency could be influenced by factors such as strong economic growth, positive trade balances, and higher interest rates in the base currency’s country.

What we learned in a nutshell

It's important to note that the concept of a "high" or "low" currency value is always relative to another currency.

This is because currencies are valued in pairs, and a currency’s exchange rate reflects its relative strengths or weaknesses against another.

Now that you've read this base currency vs quote currency article, why not try out forex CFDs?

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