Understanding FX Quotes and FX Rates
Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things regarding historical forex rates:
- 1. The first currency listed is the base currency.
- 2. The value of the base currency is always 1.
When trading forex, you will often see a two-sided quote, consisting of a ‘bid' and ‘offer'. The ‘bid' is the FX rate at which you can sell the base currency (at the same time buying the counter currency). The ‘ask' is the FX rate at which you can buy the base currency (at the same time selling the counter currency).
The US dollar is the centerpiece of the Forex market and is normally considered the ‘base' currency for quotes. It has always been considered the base of historical forex rates (fx rates). For example, a quote of USD/JPY 105.14 means that one US dollar is equal to 105.14 Japanese Yen.
When the US Dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY FX rate we previously mentioned increases to 106.25, the dollar is stronger because it will now buy more yen than before. This is what we mean when we say the FX rates have changed.
The three exceptions to this rule are the British Pound (GBP), the Australian Dollar (AUD), and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.8918 US Dollars.
In these three currency pairs, where the US Dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more US 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. A lower quote means the base currency is weakening.
Currency pairs that do not involve the US dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese Yen.