Understanding Forex Currency Rates

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Understanding Forex quotesAs traders of foreign currency, when reading Forex rates, it can be confusing which currency pair listed is the “base” currency and which currency pair is the “quote” currency. Understanding this is necessary in order to determine price action in the market. But this is really a simple process as you will soon discover. The first currency pair listed from left to right is known as the base currency and the other pair listed is the quote currency.

Forex Currency Rates: USD Pairs

As traders we must also remember that whenever we trade pairs involving the U.S. dollar, the value of the base currency is always equal to one U.S. dollar.

The U.S. dollar is the centerpiece of the Forex market and is always considered the “base” currency for quotes. In the “majors” this includes USD/JPY, USD/CHF, and the USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example a quote of USD/JPY 115.01 means that one U.S. dollar is equal to 115.01 Japanese Yen.

When the U.S. dollar is the base unit and a currency quote rises, it means that the dollar has appreciated in value and the other currency, has weakened. If the USD/JPY quote we previously mentioned increases to 117.01, the U.S. dollar is stronger because it will now buy more Japanese yen than before.

In USD pairs, the USD is almost always the base currency. The exceptions to this rule are the British pound (GBP), the Australian dollar (AUD), and the Euro (EUR) which are listed as GBP/USD, AUD/USD, and EUR/USD. In these three cases, the USD is not the base currency and a rising quote means a weakening U.S. dollar as it now takes more U.S. dollars to equal one Pound, Euro, or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. Conversely, a lower quote means the base currency is weakening.

Forex Currency Rates: Cross Currencies

In instances where currency pairs do not involve the U.S. dollar these pairs are called “cross currencies” and the premise is still the same. For example, a quote of the currency pair, EUR/JPY 129.65 signifies that one Euro is equal to 129.65 Japanese Yen

Forex Currency Rates: Bid and Ask

When trading the Forex market you will often see in the dealing currency rates window of your platform a two-sided quote, consisting of a “bid” and “ask.” The “bid” is the price at which you can sell the base currency and at the same time buy the counter currency. The “ask” is the price at which you can buy the base currency and at the same time sell the counter currency.

Now that understand how Forex currency rates work, why not open a real Forex trading account so that you can start buying and selling in the Forex market!

 

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