Base currency
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In foreign exchange markets, the base currency is the first currency in a currency pair. The second currency is named the quote currency, counter currency or terms currency. Exchange rates are quoted in per unit of the quote currency. Note that FX market convention is the reverse of mathematical convention.
Currently the euro is the dominant base currency against all other global currencies. As a result all currency pairs traded against the euro are quoted per EUR 1. e.g the USD - EUR exchange rate will be identified as EURUSD and quoted as US dollars per 1 euro (EUR/USD).
The currency hierarchy for the majors is as follows:
- Euro
- Pound sterling
- Australian dollar
- New Zealand Dollar
- United States dollar
- Canadian Dollar
- Swiss franc
- Japanese Yen
Other currencies (the minors) are generally quoted against one of the major currencies and their cross rates between each other are less well defined.
"Base currency" in foreign exchange can also mean the accounting currency or domestic currency. For example, a British bank may have a "base currency" (accounting currency) of GBP, because all profits and losses are converted to GBP. For example, if a EUR/USD position is closed out with a profit in USD by a British bank, then the "rate-to-base" will be expressed as a GBP/USD rate. Because of the ambiguous meaning of "base currency", many market participants use the expressions "currency 1" and "currency 2", where one unit of CCY1 equals a variable number of units of CCY2.
