Sending money overseas or dealing with exchange of foreign currencies requires that you have a basic understanding of how currency pairs work. This gives you the ability to make the most of fluctuations in exchange rates.
When you carry out an international fund transfer or trade in the forex market, you essentially buy or sell currencies. The two currencies involved in any given transaction make a currency pair. Read this page in its entirety to learn how currency pairs work.
What are Currency Pairs?
The forex market depends on the buying and selling of different currencies, where one currency is bought or sold in exchange for another. Put together, the set of two currencies is referred to as a currency pair. Every time you deal in the forex market or send money across borders, you buy or sell currencies in pairs.
Consider this example – you wish to purchase British pounds in exchange of U.S. dollars, so the currency pair you deal with is EUR/USD. A currency pair basically functions as a quotation of two different currencies, where the currency listed first is the base currency, and the currency that comes second is the quote currency.
A currency pair gives you an indication of how much of the quote currency you need to buy one unit of the base currency. The quote EUR/USD 1.15 implies that you may exchange €1 for U.S. $1.15. In this example, euro is the base currency and U.S. dollar is the quote currency. ISO currency codes are used to denote currencies in currency pairs.
When you buy a currency pair, you are buying the base currency in exchange of the quote currency. On the other hand, when you sell a currency pair, you are selling the base currency in exchange of the quote currency.
What Causes Currency Pair Rate Fluctuations?
You may think of a currency pair as a set of two entities always in a battle to get the upper hand. Fluctuations in exchange rates depend on how well a particular currency is performing against the other at any given time. Factors that affect exchange rate fluctuations across currency pairs include:
- Monetary policies
- Government debts
- Government intervention
- Political stability
- Trade movements
- Capital movements
- Speculative transactions
When the value of a quote currency increases, it means that the base currency has appreciated in value. In the EUR/USD example mentioned above, if the quote increases from 1.15 to 1.20, it implies that the dollar has become stronger because its purchasing power against the euro has increased.
Major Currency Pairs
The most commonly traded and liquid currency pair in the world is EUR/USD. Currencies that account for the highest volumes of trade against the U.S. dollar are called major currencies. The major currency pairs include:
|EUR/USD||European Union / United States|
|USD/JPY||United States / Japan|
|GBP/USD||United Kingdom / United States|
|AUD/USD||Australia / United States|
|USD/CHF||United States / Switzerland|
|NZD/USD||New Zealand / United States|
|USD/CAD||United States / Canada|
The top five traded currencies by value are listed in the corresponding table.
|United States dollar||USD|
Minor and Exotic Currency Pairs
Currency pairs that do not involve the U.S. dollar are called minors or crosses. These pairs are usually not as liquid as majors. Minor pairs that account for a noticeable chunk of forex trades are typically ones where individual currencies are part of major pairs. Examples include EUR/AUD, EUR/GBP, EUR/JPY, GBP/JPY, and GBP/AUD.
Currency pairs that include currencies from emerging markets such as Singapore, India, Hungary, and Brazil are referred to as exotic pairs. Some examples of exotic currency pairs include USD/SGD, USD/INR, USD/HUF, USD/BRL, and USD/HKD.
Currency Pair Nicknames
The use of nicknames to refer to popular currency pairs is common in the forex market. Examples include:
If you plan to carry out on overseas money transfer, remember that exchange rate fluctuations in currency pairs can have a telling effect on the cost, especially if you send a large amount. Fortunately, keeping track of the volatile forex market is easy because of various online tools, and some overseas money transfer companies even provide fee-free rate alerts.
Find out more about these currency pairs: