Currency Pairs Explained

The securities that are transacted in the forex markets are referred to as currency pairs. A currency pair is the relative value of one countries currency relative to another countries currency. The rates at which an investor will trade a currency pair is referred to as an exchange rate, which tells an investor the quantity of one currency they will receive in exchange for another currency.

The US dollar is considered the most widely traded base currency, as it is traded against nearly every currency throughout the globe. The most actively traded currencies against the US dollar are major currency’s which include the Japanese Yen, the Euro, the British Pound, the Canadian Dollar the Swiss Franc and the Australian dollar. What makes a currency pair a major currency pair is that is contains one of the six currencies mentioned above as well as the US dollar.

For example, the EURUSD tells an investor how many dollars are needed to purchase one Euro. The pair can also be quoted as USDEUR which tells investors how many Euros are needed to purchase one US dollar.

Minor currency pairs are those currencies that are from developed countries that traded against the US dollar but are not considered major currencies. For example, the New Zealand Dollar versus the US dollar (seen in the chart below) is referred to as a minor currency pair.

Currency Pairs

A third type of currency pair is called a cross currency pair. A cross currency pair is one where the US dollar is not one of the two currencies in the pair. For example, the Euro versus the Japanese Yen (EURJPY) tells the investors how many yen are needed to purchase one Euro. This currency pair is actively traded as a standalone currency pair but can be estimated by using the USD/JPY and the EUR/USD to generate the value of the cross. This could be accomplished by multiplying the EUR/USD exchange rate by the USD/JPY exchange rate (in some cases division is used to calculate the cross currency pair).

The last type of currency pair that is traded is called an Emerging Market currency pair. This type of currency pairs contain at least one currency that is from an EM country such as Mexico or Korea. The pair often contains the US dollar, but many EM currency pairs use the Euro or Yen as the base currency.