Each country has its own currency, but it can also happen that countries group together to form an economic community and mint a single currency for their use, as is the case with Europe (Poland is an exception).
When traveling to a foreign country we need to find out what currency is used there, and – if we want to have cash – change the currency of our country to our destination’s currency. For example, if we live in Italy (which uses euros -EUR-) and we are going to visit Japan (where the currency is the Japanese yen -JPY-) we will have to exchange euros for yen. The question is, how many Japanese yen will I get for one euro?
In asking this question, we think of what one euro is worth in terms of the Japanese yen. At the time of writing, 1 euro is equivalent to 131.43 Japanese yen. When we compare one currency against another, the currency that comes first is always worth 1 unit and it is called the base currency.
In the second part of the comparison, we have the value of 1 unit of the base currency in another currency. In other words, the second value in the currency comparison is always the number of units needed to buy 1 unit of the base currency. This second value is called the quoted currency and its value depends on the market price.
In short, when comparing two currencies, the first currency is always equal to 1 and it is called the base currency. The currency that follows is called the quote currency and is equal to the number of units needed to buy 1 unit of the base currency.
What is the use of knowing the prices of currency pairs?
Knowing how much one currency is worth against another helps us to identify the strength of one currency against the other. Following the same example of the Euro and the Japanese Yen, it is worth asking how many Euros it takes to get one Japanese Yen. In other words, what is the Japanese yen worth? At the time of writing, the JPY/EUR was equivalent to 0.076 euros, while the EUR/JPY was equivalent to 131.43 yen. This means that the EURO is worth more than the Japanese Yen because for each euro you get more yen.
In trading, the prices of currency pairs are not the same for buying and selling. The price for buying is called the bid price and the price for selling is called the ask price and the difference between the bid and ask prices is called a spread (learn what a spread is here).
Trading Note: Each country’s currency is represented by three letters, for example, the US dollar is represented as USD, the Euro as EUR, the Japanese yen as JPY, etc. The three letters are determined by the universal standard ISO 4217. The International Organization for Standardization (ISO) establishes the three letters that represent the currency of each country so that everyone uses the same letters.