Foreign Exchange

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Currency Quotations

Currency Quotations
Published:   12 Dec at 9 AM

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The currency exchange rates are always
displayed using the three letter abbreviations that are stated by the
International Organisation for Standardisation (ISO) in the ISO 4217
list. This is a list of all the currencies in this three letter format
and is so widely accepted throughout the world that the vast majority
of banks, exchanges and even the media frequently only display currencies
in this form rather than writing their full names. One of the main reasons
for this is that without this code, the use of the likes of yen, francs,
dollars etc can be very confusing due to the various different countries
that all use this currency but which has different values. For example,
at the time of writing the AUD/USD (Australian Dollar v United States
Dollar) is 0.9882, meaning that for 1 Australian dollar, you could only
buy 0.9882 United States Dollars.

An example of a currency quotation
would be as follows: USD/GBP 0.6371. This can be used as if you had
one United States Dollar (USD) you could take it to the bank and purchase
0.6371 Great British Pounds. If this changes to 0.638, it means that
the USD has increased in value due to the fact that either the Great
British Pound has got weaker for whatever reason, or the United States
dollar has got stronger or in some cases maybe even both. However, if
the exchange rate changes from this to USD/GBP 0.6360, the US dollar
has weakened against the Great British pound.

The base currency, also sometimes
referred to as the domestic currency or primary currency, is always
a single amount of the particular currency for example £1, $1 etc and
is rarely actually displayed as a number as it is expected that as the
number does not change regardless of currency, people will be aware
of it without the actual number. The latter currency is referred to
as the quote currency or occasionally the counter currency and is how
much of that currency you can purchase for 1 unit of the base currency.
So if USD/GBP is 0.632 then for USD$1 you can purchase GBP£0.632.

The most frequently traded foreign
exchange market currency pairs are generally: EUR/USD - Euro vs. U.S.
Dollar, GBP/USD - British Pound vs. U.S. Dollar, USD/JPY - U.S. Dollar
vs. Japanese Yen and USD/CHF - U.S. Dollar vs. Swiss Franc.

One thing that you may notice from
the above is that they all feature the US Dollar and the major world
powers. The one exception to this being the Swiss Franc. The main reason
for this is because whilst Switzerland may not be a major player on
the general trade scene, it is one of the finance capitals of the world
and holds billions in investments so movement to and from Switzerland
has a big effect on the foreign exchange markets. Forex currency pairs
generally display what is referred to as the “bid” and the “ask”
price. The former is the price that a broker is willing to purchase
the currency for whilst the ask price is what the broker would be willing
to sell it for. Whilst the above currencies are generally the most frequently
traded currencies, there are many other currencies that are exchanged
regularly both by traders and tourists/businesses.

« Exchange Rates - What are they and how are they calculated?

Spot Exchange Rate vs Forward Exchange Rates »