In foreign exchange markets, the first currency in a currency pair is the base currency. Whereas the second currency is referred to as the quote currency which is also called as counter currency, terms currency. Exchange rates are quoted in per unit of the base currency. The thing that should be noted is that FX market convention is the reverse of mathematical convention.

Currently for base currency, the euro has first precedence; as a result of this all currency pairs involving it should have the euro as the first currency. For instance, the exchange rate will be identified as EUR/USD between the US dollar and the euro; the number shows the amount of US dollars that can be traded for one euro.

Currency Hierarchy

Below I have given the currency hierarchy for the majors:

• Euro
• Pound sterling
• Australian dollar
• New Zealand Dollar
• United States dollar
• Canadian Dollar
• Swiss franc
• Japanese Yen

Generally other currencies that are also referred to as the minors are quoted against one of the major currencies and their cross rates between each other are less well defined.

Ambiguous meaning of Base Currency

In foreign exchange the meaning of “Base currency” can also be taken as the accounting currency or domestic currency. For instance, a British bank may possess a “base currency” or accounting currency of GBP, it is due to the reason that all profits and losses are converted to GBP. Because of the reason that the base currency has an ambiguous meaning, the expressions of “currency 1″ and “currency 2″ are used by many market participants, here one unit of CCY1 equals a variable number of units of CCY2.

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