Understanding FOREX Currency Pairs

There are five major FOREX currency pairs that are traded on the FOREX market, and they account for about 85% of all daily transactions. These FOREX currency pairs are: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, US dollar against Swiss franc, and US dollar against Canadian dollar. The FOREX currency pairs appear on the market in this form: EUR/USD, USD/JPY, GBP/USD, USD/CHF, and USD/CAD.

The key to understanding FOREX quotes is to remember that the currency listed first is the base currency and that the value of the base currency is always 1. So, a quote of EUR / USD 1.35 means that one 1 Euro is equal to 1.35 U.S. dollars. If the number increases, the value of the Euro is increasing while the U.S. dollar is decreasing, and if the number decreases then the Euro is weakening and the U.S. dollar is gaining strength.

The US dollar is normally considered the 'base' currency for quotes in the FOREX market, though there are exceptions, such as the GBP/US, where the British pound is the base currency. This also occurs with the Euro, and with the Australian Dollar. Of course, there are other currencies on the market than the major five. You may come across them being called cross currency pairs. These are simply FOREX currency pairs that do not involve the U.S. dollar. For example, EUR / JPY at 128.55 means 1 Euro is equal to 128.55 Japanese yen.