How Are Instruments Quoted In Forex?

 We can refer to foreign exchange as  two bags of money such that each bag stands for a denomination. A particular transaction at a particular time can be like buying a bag of 165 dollars in return for £100 at an airport desk. The exchange rate is $1.65 per UK pound sterling.

You may ask why is the exchange rate not £0.6061 per dollar? This the same exchange rate, just expressed differently (it is the reciprocal, or 1 divided by 1.65). The answer lies in the historical convention of quoting the price of other currencies in terms of what they cost in pounds. The pound sterling was the benchmark currency for centuries until just after World War II, meaning the central currency against which all other currencies were judged and priced.

After World War II, the US dollar became the benchmark currency and most other currencies were priced in terms of how many units of the foreign currency you could get for one dollar.

As a rule, any money not issued by your home government is “foreign.” The natural way to look at foreign exchange is to ask: “How many units of the foreign currency can I get for a fixed amount of my home currency?” This is how a tourist or an importer looks at foreign exchange. But because the dollar is currently the benchmark currency against which almost all others are priced, the dollar comes first in the name of many currency pairs, although not all. The first name in a currency pair is generally the important name and the second is the secondary or less important one.

Putting a name first is to assume that the fixed amount is denominated in that currency and the variable amount will be the other currency. In other words, the first currency is the base and you are applying a ratio to derive the price of second currency. When the European Monetary Union decided to quote the euro in the format “Euro/USD” and “Euro/JPY,” etc. it was a deliberate choice to make the euro the more important of the two currencies in every pair.

The rule is that whichever name comes first is the one that is getting stronger on higher numbers and weaker on lower numbers. If the number goes up in the pound, for example, from 1.6000 to 1.6500, it means the pound is getting stronger and by definition, the dollar is getting weaker because in this pair, the full quote should read GBP/USD. It is accurate to express the quote as $1.6000 to $1.6500, meaning the pound used to cost $1.6000 but now it costs $1.6500. Journalists usually apply the convention of putting the dollar sign in front of the price quote, although brokers and analysts tend not to insert the currency symbol.

This is also true of the euro (EUR/USD) so a higher number always means the euro is getting stronger vis-à-vis the dollar. You could say the EUR/USD moved from 1.3200 to 1.3900, meaning it got more expensive in dollar terms. If you are new to Forex, you can place an imaginary currency symbol in front to the first-named currency to get your bearings. Therefore, the price quote now looks like $1.3200 to $1.3900.

The pound, euro, Australian dollar, and New Zealand dollar are the top key currencies in which the dollar does not come first, because of historic convention. All other currencies are quoted in terms of dollars, such as USD/CHF = US dollar against the Swiss franc.