FOREX Base Currency Explained
The FOREX market makes use of a currency pair system that incorporates a base and quote currency. The base currency varies, depending on the FOREX market in question and multiple world currencies serve as base currencies in FOREX. On the other hand, the same currency may serve as a base currency in several markets with different currencies functioning as quote currencies in each case.
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Currency Pairs
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In FOREX, currencies are traded in pairs. The first currency is called the base currency while the second is called the quote currency. In any FOREX market, the price reflects the value of the base currency relative to the quote currency. For example, if the EUR/USD is trading at 1.4036, it means that one euro is worth 1.4036 U.S. dollars.
Base Currency
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The base currency is always the first currency listed and it varies depending on the FOREX market in question. Any specified currency may be the base in one market and the quote in another. For example, in the USD/JPY the U.S. dollar is the base currency while in the EUR/USD, the dollar is the quote currency with the euro being the base currency.
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Trading
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When someone buys or sells a currency pair, they are essentially betting for or against the value of the base currency. For example, when someone buys the USD/JPY they are betting that the dollar will rise against the yen. On the other hand, someone selling the USD/JPY is betting that the dollar will fall against the yen. Multiple FOREX markets provide traders will several ways to trade a base currency. For example, the USD/JPY, USD/CAD and USD/CHF markets all feature the dollar as the base currency, but it is measured against a different quote currency in each market.
Interest Rates
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In FOREX trading, the interest rate of the base currency plays an interesting role. Whenever the interest rate of the base currency is higher than the interest rate of the quote currency, a trader holding a long position benefits by collecting the net interest difference. On the other hand, a trader in a short position has the net interest difference debited from his account. This amount is known as the roll rate and is credited or debited to open positions on a daily basis.
Major Pairs
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In FOREX, the four major currency pairs are the EUR/USD, GBP/USD, USD/JPY and USD/CHF. This means that the U.S. dollar is the base currency in two of the four major pairs (USD/JPY, USD/CHF) while the euro (EUR/USD) and the pound (GBP/USD) are the base currencies in the other two pairs. Again, it is important to note that the major pairs are not ordered arbitrarily, but rather the base currency is always listed first.
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