Currency pairs

In a typical foreign exchange transaction, one party buys a quantity of one currency by paying a quantity of another currency. There are always two currencies involved in any transaction. Each currency pair (e.g. USDCAD or USD/CAD) is an individual traded product, where USD and CAD are the ISO three-letter code of the currencies involved. The base currency (USD) is quoted relative to the quote currency (CAD). For instance, the quotation USDCAD (USD/CAD) 1.0547 is the price of the USD expressed in Canadian dollars, meaning 1 USD = 1.0547 Canadian dollars. This is for buying US dollars by paying Canadian dollars or for selling US dollars for Canadian dollars.

Same rule applies to other currency pairs like GBP/JPY or EUR/GBP, each representing a forex product. For example, when one buys 100 euros by paying 133.23 US dollars, a USD/EUR pair is traded.

While there are many currencies in the world and all of them exchange hands in some quantity, there are major currencies that dominate the forex markets. Below is a table of world’s most traded currencies with daily share. The total of all currencies is 200% as every transaction involves a pair of currencies.

Most brokers allow you to trade a major currency (e.g. USD, EUR, GBP) with any currency in the list directly. But you cannot always trade small currencies (e.g. NZD) with another small one (e.g. SEK) directly. However, this kind of trade is always possible through a major currency. For example, if you want to use NZD to buy SEK, you could use your NZD to buy EUR first and then use EUR to buy SEK. Note that this involves two transactions, hence will incur double the transaction cost (which could be a fixed amount, a small percentage of the transaction amount).

The first currency appearing in a currency pair is called the "Base Currency". Historically, base currency is the stronger currency when the pair is created. Since the inception of Euro, it is required by European Central Bank that all currency pairs with Euro should use Euro as base currency (i.e. listed as the first currency).

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