Base currency and quote currency — Definition and example

Key takeaways

• In forex, currencies are traded in pairs.
• The first currency listed in each currency pair against which all others are quoted.
• The value of the base currency is always equal to 1 unit in that currency.
• The quote currency's value depends on the exchange rate of the base currency.
• The base currency is always the first listed currency in a currency pair. 
• The quote currency is the second currency listed in a currency pair. 

What is a base currency? 

Base currencies are pivotal in the foreign exchange (forex trading) market as the reference point for all transactions. They serve as an anchor point, the first currency listed in each pair against which all others are quoted; therefore, they play an instrumental role in establishing exchange rate value and helping traders analyse and execute trades successfully. 

Understanding the base currency is critical to forex traders as it determines their perception of a currency pair's value. 

What is an example of a base currency?

If the EUR/USD (euro vs US dollar) is trading at 1.3000, it stipulates that a trader would need 1.30 US dollars to purchase one euro.  

If a trader speculates to execute a trade on the EUR/USD, the Euro, as the first listed currency would be the base currency in this currency pair example.

How does the base currency affect trade direction? 

If a trader expects their base currency to appreciate relative to the quoted currency, they will buy (go long). Conversely, should they anticipate depreciation, they would sell (go short). 

As per our earlier example, if the trader expects the euro to strengthen against the US dollar, the trader will buy euros and hope to sell back at a higher price later on. If the trader expects the euro to weaken against the US dollar, the trader will sell euros to buy back at a lower price later on. 

Important facts about base currency

• The base currency is always the first listed currency in a currency pair. 
• It serves as the foundation or reference point for the exchange rate. 
• The value of the base currency is always equal to 1 unit in that currency. 
• The base currency when traders execute a forex trade is the currency they are buying or selling. 
• Exchange rates are expressed in terms of how much of the quote currency is needed to buy a single unit of the base currency. 
• In currency pairs like EUR/USD, the euro is the base currency, and the exchange rate represents how much US dollar is needed to buy 1 single euro. 

What is a quote currency? 

On the foreign exchange (forex) market, a quote currency refers to the second listed in any given currency pair and represents its exchange rate; it often goes by other names such as the secondary currency or counter currency. 

The quote currency is crucial for traders as it determines the price at which they can buy or sell a specific currency pair. 

What is an example of a quote currency? 

If USD/JPY (US dollar vs Japanese yen) is trading at 140.00, a trader will need 140.0 Japanese yen to buy one single US dollar. 

In this example, if a trader wants to speculate on USD/JPY and execute a transaction, the Japanese yen would be the quote (secondary, counter) currency in this currency pair example.

How does the base currency affect trade direction? 

A trader will buy (go long) if they expect their quoted currency to depreciate in relation to the base currency. In the event that they expect appreciation, they will sell (go short). 

In our previous example, if the trader expects the US dollar to strengthen against the Japanese yen the trader would buy US dollars and hope to sell them back at a higher rate later. If the trader expects the US Dollar to weaken against the Japanese yen the trader sells US dollars with a view to buying them back at a cheaper price later. 

Important facts about quote currency 

• The quote currency is the second currency listed in a currency pair. 
• The base currency is the currency that is used to express the rate of exchange and represents the value of a unit of the quote currency expressed in terms of its base currency. 
• The quote currency's value depends on the exchange rate of the base currency. 
• In trading, the quote currency is the currency that traders receive or pay when executing a forex trade. 
• Foreign exchange rates are expressed as the amount of the quote currency that can be acquired by selling one unit of base currency. 
• In the USD/JPY pair, the Japanese yen is the quote currency, and the exchange rate tells us how much one single US dollar is worth in Japanese yen.  

What happens when the base currency is stronger than the quote currency?

Using the GBP/USD (1.2696) example - if the base currency (British pound) value increases or the quote currency (US dollar) value decreases, the quantity of US dollars required to purchase one Australian dollar will increase.

What is the difference between base currency and quote currency? 

As the word “pairs” implies, currency pairs are traded in pairs. Although there are key differences between the base currency and quote currency; keep the following in mind.

You might find this article on forex market hours helpful. 

When a trader buys a currency pair, they are buying the base currency and selling the quote currency. The base currency is the first currency while the quote currency is the second when reading a currency pair. Each plays an important role when quoting the price a currency pair is trading at.