Reading
a foreign exchange quote may seem a bit confusing at first.
However, it's really quite simple if you remember two things:
1) The first currency listed first is the base currency and
2) the value of the base currency is always 1.
The US dollar is the centerpiece of the Forex market and
is normally considered the 'base' currency for quotes. In
the "Majors", this includes USD/JPY, USD/CHF and
USD/CAD. For these currencies and many others, quotes are
expressed as a unit of $1 USD per the second currency quoted
in the pair. For example, a quote of USD/JPY 110.00 means
that one U.S. dollar is equal to 110.0 Japanese yen.
When the U.S. dollar is the base unit and a currency quote
goes up, it means the dollar has appreciated in value and
the other currency has weakened. If the USD/JPY quote we
previously mentioned increases to 115.00, the dollar is stronger
because it will now buy more yen than before.
The three exceptions to this rule are the British pound
(GBP), the Australian dollar (AUD) and the Euro (EUR). In
these cases, you might see a quote such as GBP/USD 1.8042,
meaning that one British pound equals 1.8042 U.S. dollars.
In these three currency pairs, where the U.S. dollar is
not the base rate, a rising quote means a weakening dollar,
as it now takes more U.S. dollars to equal one pound, euro
or Australian dollar.
In other words, if a currency quote goes higher, that increases
the value of the base currency. A lower quote means the base
currency is weakening.
Currency pairs that do not involve the U.S. dollar are
called cross currencies, but the premise is the same. For
example, a quote of EUR/JPY 134.95 signifies that one Euro
is equal to 134.95 Japanese yen.
When trading forex you will often see a two-sided quote, consisting
of a 'bid' and 'offer'. The 'bid' is the price at which you
can sell the base currency (at the same time buying the counter
currency). The 'ask' is the price at which you can buy the
base currency (at the same time selling the counter currency). |
