Base Currency

The base currency is the first currency listed in a currency pair in foreign exchange. An exchange rate always states how many units of the second currency, the quote currency, are needed to buy one unit of the base currency. In the pair EUR/USD at 1.0800, the euro is the base currency, and one euro costs 1.08 US dollars.

The idea is used by banks, brokers, payment firms, corporate treasurers and travellers whenever currencies are priced or converted. Outside trading, "base currency" also has a second, accounting meaning: the main currency in which a fund, company, account or platform keeps its books and reports results, against which other currencies are measured. Both meanings share the idea of a reference unit against which everything else is valued.

A currency pair is written with the base currency first, followed by the quote currency, usually as three-letter ISO 4217 codes such as GBP/USD, USD/JPY or EUR/CHF. The quoted rate converts between them:

Going the other way, the amount in the base currency equals the amount in the quote currency divided by the rate. For example, if USD/JPY is 150.00, then 2,000 US dollars convert to:

and 450,000 yen convert to 450,000 divided by 150.00, which is 3,000 dollars. When the rate rises, the base currency has strengthened against the quote currency, because one unit of the base buys more of the quote. When the rate falls, the base currency has weakened.

Dealers quote two prices. The bid is the rate at which the dealer buys the base currency, and the ask, or offer, is the rate at which it sells it. The gap between them is the FX spread, and the average of the two is the mid-market rate. In every case, the trade is described in terms of the base currency: buying EUR/USD means buying euros and selling dollars.

Which currency comes first is fixed by long-standing market convention rather than by any law. A rough order of priority is used, with the euro usually placed first, followed by the British pound, the Australian and New Zealand dollars, the US dollar, the Canadian dollar, the Swiss franc and the Japanese yen. This is why the market quotes EUR/USD and GBP/USD with the dollar second, but USD/JPY and USD/CAD with the dollar first. Most emerging market currencies are quoted against the dollar as the base, for example USD/INR or USD/BRL. Pairs that do not include the dollar are called crosses. A quote can always be inverted, but trading platforms, interbank systems and payment providers follow the convention to avoid confusion over which side of a deal a client is on.

In the second sense, a base currency is the unit in which a portfolio, fund, account or business measures value. An investment fund with a base currency of US dollars reports its net asset value in dollars even if it holds euro and yen assets, and its returns include the effect of exchange rate moves on those holdings. A multi-currency wallet or brokerage account may let the customer choose a base currency for showing the total balance. A company reports in its presentation currency and records transactions in its functional currency, accounting terms that serve a similar role. Payment providers use the related ideas of a reference currency for pricing and a settlement currency for paying out, which may differ from the customer's base currency and trigger currency conversion.

• Reading prices correctly. Mixing up base and quote currency inverts the rate, so a customer might think a currency is cheaper or dearer than it is.
• Measuring exposure. Treasurers express their open positions relative to their base currency, which shows which moves will produce gains or losses and guides hedging decisions.
• Trade sizing. Contract sizes and profit and loss in FX trading are usually stated in units of the base currency, while price changes are measured in the quote currency.
• Fees and markups. Payment providers often add a margin to the rate, and the effect of that margin depends on which currency is being bought, so transparent quotes show both currencies and the direction of the deal. For example, an FX spot transaction confirmation will state the base amount, the rate and the resulting quote amount.