What are Currency Pairs?

Published by Thomas Herold in Economics, Trading

'Currency Pairs' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Currency pairs are two currencies expressed in terms of each other. They are price quoted in the forex market. One currency’s value is always expressed against another currency, such as with GBP/USD. This creates the values of currency comparisons against other currencies. In a currency pair, the first one listed is referred to as the base currency. Forex market brokers call the second currency in the pair the quote currency. The pairing explains the numbers of units of the quote currency investors need to buy a base currency unit.

Forex trades always concern two of these pairs. When investors purchase a currency in the forex market they are buying the one and selling another at the same time. This does not change the fact that the currency pair is still one unit whether the trader buys it or sell it. When they buy the pair, they are actually purchasing the base currency by selling the quote currency. When they sell the pair, they are instead selling the base currency by buying the quote currency.

Currency pair values are expressed by bid and ask prices. The bid is how much it will cost to buy a single unit of base currency in quote currency. The ask price is the selling price to obtain a single unit of the quote currency in terms of the base currency.

As an example, consider the EUR/USD. When this pair is quoted as EUR/USD = 1.12, a buyer who purchases it receives one euro for $1.12 US. A seller of this pair would be trading 1 euro to obtain $1.12 US. These pairs can be quoted in reverse as well, as in USD/EUR. For example in this configuration the pair might list for .8975. Buying a single dollar would cost .8975 Euros with this example. Generally the more expensive currency is listed as the base currency for the pairs in forex markets.

In fact the most commonly traded of the pairs is the EUR/USD. This pairing receives not only interest from people who wish to change dollars for Euros and vice versa. There is additional interest generated by other Euro cross pairs, such as with EUR/CHF against the Swiss Franc, EUR/GBP against the British Pound, and EUR/JPY against the Japanese Yen.

The interest in these pairs is typically opposite the direction of the U.S. dollar. This means that when the market is negative on the U.S. dollar, the Euro will receive bids because of the general selling of USD. The other pairs against the dollar which are less liquid as in USD/CHF also are sold using the more liquid pairings. This would also create bids for Euros in the EUR/USD pair and market.

The second most active pair of forex currencies is the USD/JPY. This pair has a history of having the greatest correlation to political relations between the U.S. and Japan. Many U.S. administrations have employed this currency pair in an attempt to influence trade with Japan. The Chinese have taken over the top trade tension place for the U.S. in Asia. USD/JPY still functions in its role as Chinese regional currency proxy.

There are other major currency pairs that occupy the majority of trades in the Forex markets. The pairs that are considered among the major are the ones that trade against the other majors. Besides the Euro, the U.S. Dollar, and the Japanese Yen, these majors include the British pound, the Canadian Dollar, the Swiss Franc, the New Zealand Dollar, and the Australian Dollar.

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The term 'Currency Pairs' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.