Currency Pair

A currency pair is the quotation of two currencies against each other in the foreign exchange (FX) market, written in a form such as EUR/USD, USD/JPY or GBP/INR. The first currency is the base currency and the second is the quote (or counter) currency. The price tells how many units of the quote currency are needed to buy one unit of the base currency: EUR/USD at 1.0850 means one euro costs 1.0850 US dollars.

Every foreign exchange transaction, from an interbank trade to a tourist's card payment abroad, involves a currency pair, because buying one currency always means selling another.

Currencies are identified by three-letter ISO 4217 codes, such as USD, EUR, JPY and CNY. Dealers quote two prices for each pair: a bid, at which they buy the base currency, and an ask (or offer), at which they sell it. The difference is the FX spread, and the average of the two is the mid-market rate. Retail providers often add an FX markup on top of the wholesale price.

Price movements are measured in pips. For most pairs a pip is the fourth decimal place (0.0001); for pairs quoted against the Japanese yen it is the second decimal place (0.01). A move in EUR/USD from 1.0850 to 1.0865 is a 15-pip rise. Market convention also fixes which currency is the base: the euro generally comes first, followed by sterling, the Australian and New Zealand dollars, then the US dollar, so the market quotes EUR/USD and GBP/USD but USD/JPY and USD/CAD.

• Majors — pairs that include the US dollar and another heavily traded currency, such as EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD. They have the deepest liquidity and tightest spreads.
• Crosses — pairs that do not include the dollar, such as EUR/GBP or EUR/JPY.
• Exotics — a major currency against an exotic currency from a smaller or emerging market, such as USD/TRY or USD/PKR, where liquidity is thinner and spreads wider.

Many exotic and cross pairs do not trade directly in size. Their prices are derived from two dollar pairs, and in payments the conversion may physically pass through dollars, a pattern described under double currency conversion.

Suppose EUR/USD is 1.0800 and USD/JPY is 150.00. The EUR/JPY cross rate is found by multiplying: 1.0800 × 150.00 = 162.00 yen per euro. If GBP/USD is 1.2600, then EUR/GBP is 1.0800 ÷ 1.2600, or about 0.8571. A business converting €100,000 to yen at the derived mid rate would receive ¥16,200,000 before any spread or fee.

Inverting a pair is equally simple: if USD/JPY is 150.00, then JPY/USD is 1 ÷ 150, or about 0.00667. Quoting the same pair in two directions is a common source of errors in payment instructions and invoices.

Traders take views on the direction of a pair, for instance through a spot trade, a forward contract or an FX swap, and strategies such as the carry trade exploit interest differentials between the two currencies. Price differences for the same pair across venues create opportunities for currency arbitrage.

In cross-border payments, the pair determines which liquidity pool a provider must access. Money transfer operators price each payment corridor according to the pair involved, and settlement risk between the two legs of a trade is managed through mechanisms such as Continuous Linked Settlement (CLS). At the card terminal, dynamic currency conversion lets a merchant quote the pair itself, usually at a less favorable rate than the cardholder's bank would apply.