Base Currency

Base Currency: The base currency, also known as the primary currency or domestic currency, is the currency against which exchange rates are quoted in a currency pair in the foreign exchange market. It is the first currency listed in a currency pair and serves as the basis for determining the value of the second currency, known as the quote currency or counter currency. The value of the base currency is always set at 1.

Examples:

• In the currency pair EUR/USD, the euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency. This means that 1 euro is equivalent to a certain number of U.S. dollars.
• Similarly, in the currency pair GBP/JPY, the British pound (GBP) is the base currency, and the Japanese yen (JPY) is the quote currency. Thus, 1 British pound equals a certain amount of Japanese yen.

Cases:

• If the exchange rate for EUR/USD is 1.20, it means that 1 euro is equivalent to 1.20 U.S. dollars. In this case, the euro is the base currency, and the U.S. dollar is the quote currency.
• If the exchange rate for USD/JPY is 110.50, it indicates that 1 U.S. dollar is equivalent to 110.50 Japanese yen. Here, the U.S. dollar serves as the base currency, and the Japanese yen is the quote currency.

Understanding the base currency is fundamental in forex trading as it determines how much of the quote currency is needed to purchase one unit of the base currency. Traders analyze changes in exchange rates to make informed decisions regarding buying and selling currency pairs, taking into account factors such as economic indicators, geopolitical events, and central bank policies.