Currency Pairs: What They are, How They Work, Examples

What Are Currency Pairs?

Currency pairs are the national currencies from two countries coupled for trading on the foreign exchange (FX) marketplace. Both currencies will have exchange rates on which the trade will have its position basis. All trading within the forex market, whether selling, buying, or trading, will take place through currency pairs.

How Currency Pairs Work

The currency exchange rates of foreign currency pairs float. This floating rate means that the exchange rate continually changes. These changes can be due to a multitude of factors. The currency pairs serve to set the value of one vs. another, and the exchange rates will continuously fluctuate based on the respective changing values. One currency will always hold stronger than the other.

The calculation for the rates between foreign currency pairs is a factor of the base currency. A typical currency pair listing may appear as, EUR/USD 1.3045. In this example, the euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency. The difference between the two currencies is a ratio price. In the example, one euro will trade for 1.3045 U.S. dollars. In other words, the base currency is multiplied to yield an equivalent value or purchasing power of the foreign currency.

Using the above example, a currency trader would establish a position where they are simultaneously long the euro, and short the dollar. For traders to make a profit, the euro exchange rate must increase. Alternatively, when a forex trader shorts the EUR/USD currency pair, they speculate that the value of the U.S. dollar will rise above the euro. The changes in currency exchange rates are known as the percentage-in-point movement (PIP).

Common Currency Pairs

Nearly any nation's currency may trade, but some currencies pair more frequently than other money. All of the primary currency pairs contain the USD. There are many major currency pairs within the forex market around the world. As an example, some of the most common currency pairs outside of the Eurodollar are:

• USD/JPY. This currency pair sets the US dollar against the Japanese Yen.
• USD/GBP. This currency pair sets the US dollar against the United Kingdom pound and is commonly referred to as the pound-dollar.
• USD/CHF. This currency pair sets the US dollar against the Switzerland currency. It is referred to as the dollar swissy.
• USD/CAD. This currency pair sets the US dollar against the Canadian dollar. It is referred to as the dollar-loonie.
• AUD/USD. This currency pair sets the US dollar against the Australian dollar and is referred to as the Aussie dollar.
• NZD/USD. This currency pair sets the currency of New Zealand against the US dollar, and it is referred to as the kiwi dollar.

There are also currency pairs that do not trade against the US dollar, which have the name cross-currency pairs. Common cross currency pairs involve the euro and the Japanese yen.