What is a Currency Pair?
A currency pair is a quotation between two different currencies, where one is quoted against the other. The first listed currency within a currency pair is called the base, while the second currency that is the benchmark is called the quote.
Currency pairs are meant to be compared against one another in order to understand how much of the quote currency is required to buy one unit of the base currency. Often, to identify each currency, there is a three-letter symbol associated with it. For instance, to represent the Canadian dollar in international markets, it is defined as “CAD.”
- A currency pair is considered a price quote between two different currencies within the foreign exchange market.
- The first listed currency within a currency pair is called the base, while the second currency that is the benchmark is called the quote.
- Major currencies are considered currencies that are most often traded against the U.S. dollar, such as EUR/USD, AUD/USD, and USD/CAD.
Understanding Currency Pairs
Trading currency pairs are often conducted in the foreign exchange market. The forex market enables buying and selling, and conversion of currencies for international trade and investing. Generally speaking, the forex market is open 5 days per week, 24 hours a day.
Forex trading involves the constant purchase and sale of currency. When buying a currency pair, investors purchase the base currency and sell the quoted currency to profit from the difference. The bid price represents the amount of quote currency needed to receive one unit of the base currency.
On the other hand, when the currency pair is sold, the investor sells the base currency and receives the quote currency. Thus, the selling price of the currency pair is the amount one will receive in the quote currency for one unit of the base currency.
Nonetheless, when trading currencies, investors are selling one currency in order to buy another.
Base and Quote Currency
Within the foreign exchange market, currency unit prices are known as currency pairs. The base currency is considered the first currency within the currency pair quotation, with the second part of the quotation being the quote currency. Currency pairs are often presented as 6 letters with a dash: AAA/BBB. In this case, AAA is the base currency, while BBB is the quote currency.
Factors that Impact Currency Pairs
The following are several factors that affect currency pairs:
- Interest rates
- Gross Domestic Product (GDP)
- Federal Reserve actions
- Other economic announcements
Currency Pairs Examples
The most actively traded currency pair is the euro against the U.S. dollar – also known as EUR/USD. To read currency pairs, here is an example:
It is 2025, and Johnny plans to go to New York for vacation. He resides in Canada and only carries Canadian dollars. Thus, he goes to the currency exchange store and wishes to exchange his CAD to USD. The store clerk states that the quote is USD/CAD = 1.3. It means that $1 USD is equivalent to $1.3 CAD.
In our example, USD is considered the base currency, and CAD is the quote currency. Thus, Johnny is able to exchange $1.3 of CAD per $1 of USD at the currency exchange store.
Globally, there are many different currency pairs, and they are categorized based on the frequency and volume of their trades. Using the U.S. dollar as the benchmark, the currencies that trade the most volume against it are known as major currencies. The list of major currency pairs includes, but is not limited to, the following:
Exotic Currency Pairs
Currencies that are not associated with the U.S. dollar are considered exotic currency pairs. An example is USD/SGD. Exotic currency pairs include currencies that stem from emerging markets. Therefore, they are known to be more illiquid and come with wider spreads; thus, making them riskier.
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