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What is a currency pair?

What is a currency pair?

Currency exchange rates are discussed in terms of currency pairs, where you say how much of a given currency it would take to equal one unit of another currency.

The single-unit currency is the “base” currency in the pair, and it appears as the second currency or denominator in the comparison. The base currency is always implied to be 1 unit, so only the value of the other currency in the pair is stated in the exchange rate quote.

Currency pairs are the normal units of comparison for the Forex market, consisting of two foreign currencies and giving the number of the first currency units which can be exchanged for one unit of the second currency at a spot. Popular currency pairs are routinely checked by all sorts of analysts and traders, whether or not they are active investors in the Forex market.

Anyone currency has no discernible value on an international level unless it is quoted in terms of other currencies. Currency pairs are those comparisons, and they tend to appear on an updated table or matrix with many currencies listed and their exchange rates posted at the intersection of their columns and rows.

Most of the currencies you’ll see on the tables are floating currencies, which are not fixed to any other currency and whose value will fluctuate in relation to most other currencies. Some currencies are pegged to another currency so that their value directly follows the value of the reference currency.

The most traded currency pairs are known as the Majors, and these are EUR/USD, GBP/USD, USD/CHF, and USD/JPY. There are also a few floating currencies whose value is highly correlated to commodities because of their abundant natural resources; these are USD/CAD, AUD/USD, and NZD/USD.

They are called the commodity pairs. There are other countries with even more wealth tied to commodities, but they do not have floating currencies.

Some currencies have a value that is pegged at a fixed rate of exchange to commodities such as gold, but these are not considered part of the commodity pairs because analysts can easily look at the exchange rate between any given currency and the commodity in question.

Keywords: commodity, currency pairs, pegged currency, forex market, pair trading, the majors,