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What Is a Quote Currency?
In foreign exchange (FOREX), the quote currency, also known as the counter currency, is the second currency in both a direct and indirect currency pair. The quote currency is used to determine the value of the base currency. The quote currency is listed after the base currency in the pair when currency exchange rates are quoted.
Key Takeaways
- The quote currency is the second currency in both a direct and indirect currency pair and is used to value the base currency.
- Currency quotes show investors how many units of the quote currency they will need to exchange for one unit of the base currency.
- In a direct quote, the quote currency is the foreign currency.
- The quote currency is the domestic currency in an indirect quote.
Trading Currencies
Understanding the quotation and pricing structure of currencies is essential for investors who want to trade currencies in the forex market. Market makers tend to trade specific currency pairs directly or indirectly. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency.
Investors can determine how much of the quote currency they need to sell to purchase one unit of the first or base currency. As the rate in a currency pair increases, the value of the quote currency falls, whether the pair is direct or indirect. Most U.S. dollar (USD) pairs hold the USD as the base currency. If the USD is not the base, it is a reciprocal currency.
Currencies are commonly bought and sold on the spot market based on their trading price. The price is determined by supply and demand and calculated based on interest rates, economic performance, geopolitical environment, and price speculation.
Example
Let’s assume a trader wants to purchase £400 using U.S. dollars. This would involve a trade using the GBP/USD currency pair. To execute the trade, they need to figure out how many USD (the quote currency) they need to sell to get £400.
If the exchange rate for the pair at the end of the trading day is 1.4103, it costs the trader $1.4103 to purchase £1. To complete the transaction on that day, the trader has to sell 564.12 units of the quote currency to get 400 units of the base currency or $564.12 for £400 = (400 x 1.4103).
Cross Rate
Most currency exchange rates are quoted against the U.S. Dollar, the world’s reserve currency. Cross rates are used when traders or investors want to exchange one foreign currency directly for another foreign currency without converting it to USD first.
The cross rate between the U.S. dollar and Canadian dollar is denoted as USD/CAD and is a direct quote. This means that the CAD is the quote currency, while the USD is the base currency. The CAD is used as a reference to determine the value of one USD. From a U.S.-centric point of view, the CAD is a foreign currency.
On the other hand, the EUR/USD denotes the cross rate between the euro and the U.S. dollar and is an indirect quote. This means that the EUR is the base currency, and the USD is the quote currency. Here, the USD is the domestic currency and determines the value of one EUR.
Currency Pairs
Currency pairs—both base and quote currencies—are affected by several factors, including economic activity, the monetary and fiscal policy enacted by central banks, and interest rates. Major currencies, such as the euro and the USD, are more likely to be the base currency than the quote currency in a currency pair, especially when trading in exotic currencies.
The most commonly traded currency pairs in 2023 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)
- NZD/USD (New Zealand Dollar/US Dollar)
The first currency in these pairings is the base currency, while the second is the quote currency. In the GBP/USD pairing, the pound is the base currency or the one purchased, while the dollar is the quote currency and the one being sold.
What Is Foreign Exchange (FOREX) Trading?
Foreign exchange trading is the process of buying one currency and selling another to make a profit from the trade.
When Is Currency Trading Conducted?
The foreign exchange market (FX) is an over-the-counter (OTC) marketplace that determines the exchange rate for global currencies made up of an international network of financial centers that transact 24 hours a day.
What Agency Regulates Currency Trading?
In the U.S, The Commodities Futures Trading Commission (CFTC) has the primary responsibility for oversee the commodities markets, including foreign currency trading.
The Bottom Line
Currencies are exchanged on the FOREX. The quote currency is the second currency in both a direct and indirect currency pair and is used to value the base currency. An example of a currency pair is EUR/USD, the most traded pair. Currency quotes show investors how many units of the quote currency they will need to exchange for one unit of the base currency.