Base Currency: Definition, Example, vs. Quote Currency

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Will Kenton
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Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.
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Updated November 30, 2023
Reviewed by Julius Mansa
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Ariel Courage
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Fact checked by Ariel Courage
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Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

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What Is Base Currency?

The term base currency refers to the first currency that appears in a currency pair. In the foreign exchange market, currency unit prices are quoted as currency pairs. The base currency is normally considered the domestic currency and is followed by the quote currency or the counter currency in the pair. In the forex market, currency pairs are commonly depicted as XXX/YYY where the XXX is the base currency. The currency pair represents how much of the quote currency you need to get one unit of the base currency.

Key Takeaways

  • A base currency is the first currency in a currency pair.
  • The exchange rate indicates how much of the quote currency is needed to purchase a single unit of the base currency in a currency pair.
  • The U.S. dollar is one of the most common base currencies.
  • Investors generally purchase currency pairs if they think the base currency will gain value over the quote currency.

Understanding Base Currencies

The foreign exchange or forex market (FX) is the market where currencies are traded. It is considered to be one of the most liquid markets in the world with trillions traded each day. Trades are made using currency pairs, with a base currency and quote or counter currency. Pairs are written as XXX/YYY or simply XXXYYY, where XXX is the base currency and YYY is the quote currency. Samples are GBP/AUD, EUR/USD, USD/JPY, GBPJPY, EURNZD, and EURCHF.

These currencies are represented using currency codes. The abbreviations used for currencies are prescribed by the International Organization for Standardization (ISO). These codes are provided in standard ISO 4217. Currency pairs use these codes made of three letters to represent a particular currency.

The major currency codes used in currency pairs include USD for the U.S. dollar, EUR for the euro, JPY for the Japanese yen, GBP for the British pound, AUD for the Australian dollar, CAD for the Canadian dollar, and CHF for the Swiss franc. The U.S. dollar, or USD, is one of the most common base currencies in the forex market.

Traders use the currency pair to determine how much of the quote currency is needed for them to purchase one unit of the base currency. For example, if you were looking at the CAD/USD currency pair, the Canadian dollar is the base currency and the U.S. dollar is the quote currency.

Currencies constituting a currency pair are sometimes separated with a slash character. The slash may be omitted or replaced by a period, a dash, or nothing at all.

Special Considerations

Forex quotations are stated as pairs because investors simultaneously buy and sell currencies. For example, when a buyer purchases EUR/USD, it means that he is buying euros and selling U.S. dollars at the same time. When the base currency (EUR) is strong, it takes more of the quote currency (USD) to buy a single unit of the base currency. This means that a trader has to use more U.S. dollars to buy a single Euro.

Investors generally buy the pair if they think that the base currency will gain value in contrast with the quote currency. On the other hand, they may decide to sell the pair if they think that the base currency will lose value in contrast with the quote currency.

For accounting purposes, a firm may use the base currency as the domestic currency or accounting currency to represent all profits and losses.

How to Read Base Currencies

When provided with an exchange rate, currency pairs indicate how much of the quote currency is needed to buy one unit of the provided base currency. For example, reading EUR/USD = 1.55 means that €1 is equal to $1.55.

According to foreign exchange standards, if a trader wants to purchase €1, they must pay $1.55. The currency pair quotation is read in the same manner when selling the base currency, so if a seller wants to sell €1, they will get $1.55 for it.

Why Is It Called a Base Currency?

Foreign exchange is conducted in currency pairs where one currency is the base currency and the other is called the quote or counter currency. A base currency is named so because it is the first currency in the pair, which reflects how much of the quote currency is needed to buy one unit of the base currency.

What Happens When a Base Currency Is Stronger Than a Quote Currrency?

Currency pairs represent how much of a quote currency you need to buy a single unit of the base currency. So when the base currency is stronger, it takes a greater amount of the quote currency to buy a single unit of the base currency. For instance, let's assume a trader is looking at a currency pair of USD/CHF, where the USD is the base currency and the CHF is the quote currency. If the value of the USD increases, it will take more Swiss francs to buy one dollar.

How Do I Choose a Base Currency?

There are several factors to consider when it comes to choosing a base currency. Some traders have a preferred currency while others often look at liquidity in the market. This helps cut down transaction costs and makes currency trading easier. Another consideration is where the base currency is based. Some traders only use base currencies from countries with stable economies to ensure a smoother trading experience.

The Bottom Line

The foreign exchange market is where traders buy and sell currencies. Open 24 hours a day, seven days a week, there is no centralized marketplace. Despite this, it's important to understand some of the nuances if you wish to profit from currency trading. These assets are sold in pairs like the USD/GBP, the USD/CAD, and the USD/CHF. In these cases, the USD acts as the base currency while the others are referred to as the quote currencies. When you're considering which base currency to use, consider the economy of the home country and how heavily it is traded. That is, of course, if you don't already have a preferred currency in mind.

Correction—May 23, 2024: This article has been corrected to state that a currency pair's exchange rate indicates how much of the quote currency is needed to purchase a single unit of the base currency.

Article Sources
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  1. International Organization for Standardization. "ISO 4217 Currency Codes."

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