Currency pairs are simply quotations that relate the current comparative worth of one nation’s currency to the currency issued by a different nation. Essentially, the currency pair illustrates the rate of exchange that would take place if a single unit of one currency was exchanged for a similar unit of currency issued by another country. The concept of the currency pair functions as the essential comparison that is used by many persons who choose to engage in Forex investments, as well as people who travel extensively to different countries.
In structuring the currency pair, one currency is identified as the transaction or base currency. This is the currency that sets the standard for the comparison. The second currency is referred to as the quote or counter currency. This currency functions as the comparative measure to determine the worth of the base currency when it is compared to the current worth of the counter currency.
A currency pair always involves two different currencies issued by two different countries. Essentially, the current market value of each type of currency is cross-referenced with the other. Typically, it is the smallest unit of currency for each country that is used for the currency pair. For example, if the base currency used in the calculation is the United States dollar, the counter currency could be the Euro or the British pound. The idea is to determine how much the US dollar is worth if exchanged for a Euro or a pound.
In detailing the currency pair, it is customary to identify the base currency first, then the counter currency. For example, if comparing the current worth of the Euro to the United States dollar, the currency pair would be written as “EUR/USD”. In addition, the current value of the Euro would be placed after the identification of the two currencies. Thus, if a single Euro is currently exchanging for a total of $1.50 in United States Dollars (USD), the currency pair would be written as “EUR/USD 1.5000.”
Investors who engage in foreign exchange transactions on a daily basis know that the currency pair between any two countries will change regularly. Knowing which currency is strengthening or weakening in comparison to another currency is extremely important to the process of currency exchange deals. Tracking the current rate of exchange between two currencies can lead to buying and selling action that will result in making a profit, assuming that the comparative worth is monitoring closely. This type of effort can be very time consuming, but also can produce an excellent return.