| By :
Cedric Welsch
A foreign currency pair simply refers to the quotation of the value of one currency relative to that of another. The currency used as the base or reference point is known as the base currency. The tender quoted relative to the base is known as the quote or counter tender. By industry convention, pairs are written using abbreviations formulated by the International Organization for Standardization (ISO) according to standard ISO 4217. This standard requires the base tender to be written first and then the counter tender, the two units being separated with a slash. A EUR/USD 1.3250 quotation means that 1.0000 Euro (the base) is exchanged for 1.3250 US dollars (the counter). Another way of expressing the exact same value of these two currencies would be to use the US dollar as the base; in which case the notation would be USD/EUR 0.7547 indicating that 1.0000 US dollar is valued at 0.7547 Euros. To emphasize, regardless of whether the transaction is quoted as EUR/USD 1.3250 or USD/EUR 0.7547, the value of each of these currencies with respect to each other remains the same. However, standardizing the terminology helps facilitates communications and helps avoid unnecessary confusion. All transactions in the foreign exchange market involve the simultaneous buying of one tender and the selling of another tender. This, of course, is a truism since the tender purchased in a forex trade is itself a tender (or money) and that product is purchased with money. Traders buy and sell individual currencies. They buy one tender in exchange for another. However, again as a matter of industry convention, these same transactions are often described as the buying of a pair. This terminology is used for the sake of brevity and convenience. For example, if a forex trader buys a base tender in exchange for the quote tender, that same transaction is described as the trader buying the pair. Specifically, if a trade is quoted as EUR/USD, the trader buys Euros and sells US dollars or, alternatively, simply as buying the EUR/USD pair. Conversely, a trader selling the EUR/USD pair sells EUR and buys USD. In conclusion, the foreign currency pairs most traded globally in the forex market are the EUR/USD, USD/JPY, USD/CHF, GBP/USD, AUD/USD and USD/CAD. The value of foreign exchange trades involving these six pairs generally account for at least 80% of the total foreign exchange market. The seven currencies are for that reason known as the majors.
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