The quote currency is the second currency in a currency pair in the forex (foreign exchange) market. Its value is quoted relative to one unit of the first currency in the pair, known as the “base currency.”
In a currency pair, the value of the quote currency is given in terms of the base currency.
For example, in the currency pair EUR/USD:
- EUR is the base currency.
- USD is the quote currency.
If the EUR/USD pair is quoted at 1.1500, it means that 1 Euro (the base currency) is equivalent to 1.15 US Dollars (the quote currency).
When trading in the forex market, traders will look at the value of the quote currency relative to the base currency to determine their trading strategies. The quote currency is also sometimes referred to as the “counter currency” or “secondary currency.”
Example of the Quote Currency
Let’s delve deeper into the EUR/USD currency pair to illustrate the concept of the quote currency.
Example: EUR/USD Currency Pair
Imagine you’re watching a forex trading platform, and you see the EUR/USD pair listed at 1.2500.
- EUR (Euro) is the base currency.
- USD (US Dollar) is the quote currency.
The value “1.2500” means that 1 Euro is equivalent to 1.25 US Dollars.
Scenario 1: Buying Euros
You believe that the Euro will strengthen against the US Dollar in the upcoming days. You decide to purchase €10,000.
At the current rate of 1.2500, you would need $12,500 to buy €10,000 (because €1 = $1.25).
Scenario 2: Selling Euros
Now, let’s say a few days later, the EUR/USD rate rises to 1.2600, meaning the Euro has strengthened against the US Dollar. You decide to sell your €10,000.
At this new rate, your €10,000 would convert to $12,600.
By trading based on your prediction, you made a profit of $100 ($12,600 – $12,500).
In this example, the USD (quote currency) value fluctuated relative to 1 EUR (base currency). The goal in forex trading is often to predict these fluctuations and trade accordingly. The quote currency helps traders determine how much of one currency they need to spend or will receive when buying or selling the base currency.