Base and Counter Currency Meaning

When we learn driving a car than at the beginning we are told about accelerator and brake as without knowing them we cannot learn car and if an individual drives a car without understanding about brake and accelerator than it will result in accident, in the same way in case of foreign exchange base and counter currency are the two terms which one should learn first as without learning these two terms one cannot achieve expertise in foreign exchange and if one do foreign exchange trading without knowing about base and counter currency than it will result in financial accident and loss for an individual, let’s look at meaning of base currency and counter currency –

Base Currency Meaning

In currency markets currencies are quoted in pairs and base currency is the first currency which appears in the quotation so in USD/ EURO currency pair the first currency that is USD will be base currency. Also while interpreting the currency quotation one should keep in mind that one is buying a single unit of the base currency against the quoted currency. So for example, if one wants to buy 1 dollar and USD/EURO rate is 2 than one requires 2 euro to buy 1 dollar from the currency markets.

Counter Currency Meaning

Counter currency is the second currency of the currency pair traded in the currency market, hence in above case, it is the EURO which is the counter currency against the US dollar. So for example, if one wants to buy 1 Euro and USD/EURO rate is 2 than one requires $.5 dollar from the currency markets.

As one can see from the above that both base and counter currency are two sides of the same coin because one can either buy or sell counter currency using base currency and buy or sell base currency using counter currency. If one wants to remember easily the concept than one should keep in mind that base currency comes first or it is left-hand side of the currency quote and counter currency comes after base currency and it is the right-hand side of the currency quote.

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