What Are Currency Pairs?
All trading within the foreign exchange (FX) market, whether selling, buying, or trading, is completed in currency pairs. Both national currencies have independent exchange rates. In a currency pair, one currency is the base currency and the other is the quote currency.
Key Takeaways
- All trading within the forex market occurs in currency pairs.
- Exchange rates continuously fluctuate based on the respective changing values of the currency in the pair.
- In a currency pair, one currency is the base currency and the other is the quote currency.
Exchange Rates
The exchange rates of foreign currency pairs float. This floating rate means that the exchange rate continually changes. The currency pairs set the value of one vs. another, and the exchange rates continuously fluctuate based on the respective changing values.
The exchange rate between foreign currency pairs depends on the base currency. A typical currency pair listing may be EUR/USD 1.3045. The euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency. Here, €1 equals $1.3045.
The base currency, equal to one unit, is multiplied to yield an equivalent value or purchasing power of the foreign currency. The changes in currency exchange rates are known as the percentage-in-point movement (PIP).
Commonly Traded Pairs
Some currencies pair more frequently than other money and most contain the USD. The most commonly traded pairs include.
- 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 renminbi)
- USD/CHF (US dollar/Swiss franc)
- USD/HKD (US dollar/Hong Kong dollar)
- EUR/GBP (euro/British pound sterling)
- USD/KRW (US dollar/South Korean won)
What Is a Cross-Currency Pair?
A cross-currency pair does not include or use the U.S. dollar as a settlement currency. Common cross-currency pairs involve the euro and the Japanese yen.
What Is the Forex Market?
The forex market allows individuals, banks, and funds to buy, sell, or exchange currencies for hedging and speculative purposes. It is an over-the-counter (OTC) market that operates 24 hours a day, five days a week.
How Can Traders Profit in Currency Pairs?
Suppose a pair is listed as EUR/USD 1.55. A currency trader may establish a position where they are simultaneously long the euro and short the dollar. For traders to make a profit, the euro exchange rate must increase. Alternatively, when a forex trader shorts the EUR/USD currency pair, they speculate that the value of the U.S. dollar will rise above the euro.
The Bottom Line
A currency pair includes a base currency and a quote currency. All currency trading on the foreign exchange market occurs in pairs. The exchange rates fluctuate based on the changing values of each currency.
