Direct Currency Quote vs. Indirect Currency Quote

With the understanding of base/quote currencies as quoted on forex, the potential investor should not consider how to quote a currency pair. This can be done either through direct or indirect quotes.

A direct currency quote refers to any currency pair where the domestic currency serves as the quoted currency. If, for example, one were to consider the American dollar as domestic and the Canadian currency as foreign, a direct quote would be CAD/USD. The direct quote will vary the domestic currency and the base will remain fixed as one unit.

Indirect currency quotes qualify as currency pairs where the domestic currency is the base currency. Using the same model as above, an indirect quote would be reversed, or USD/CAD. Using this quote shows the foreign currency as the variable and the domestic currency as the one-unit fixed model.

Most currencies in the forex market get traded against the U.S. dollar, which means the dollar typically ends up as the base currency in the currency pair. There are some exceptions to this rule, however, particularly in regard to currencies with historical ties to Britain, including the British pound, Australian dollar, and the New Zealand dollar. These currencies all get quoted as the base currency against the U.S. dollar, making the U.S. dollar the counter currency

Some notes on these currencies:

U.S. Dollar

The most actively traded currency in the world. Typically used as the base currency in paired currency comparisons.

British Pound

Replaces the U.S. dollar as the base whenever quoted against other currencies. The pound enjoys this status due to its longevity as the former dominant currency in the worlds prior to the ascendancy of the U.S. dollar. It helps to think of it as the retired legend in the field that people still bow to in the hallway.

Euro

Although not introduced to the world until 1999, the euro ended replacing many European currencies including marks, francs, and guilders. The creators of the euro intended the currency to be the financial market’s dominant currency. For this reason, it specified that the euro should always be the base currency whenever it is traded, even against both the U.S. dollar and the British pound.

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