Base Currency

  

Categories: Forex, Econ

The price of most things are given in some currency. A Big Mac might be $4.99, a share of Apple stock might be $225, or a pint of Guinness might cost €5 in a Dublin pub. Based on where you are, you know what currency to use, and everything you want to buy is just listed in a certain amount of that currency.

But what if you are buying currencies? What if you're trading one currency for another? How do list the price?

Like...if you're trading U.S. dollars to Canadian dollars, you could either say one U.S. dollar is worth C$1.30, or you could say one Canadian dollar is worth $0.77. It could go either way.

That's where base currencies come in. Currency pairs (the prices of two currencies trading against each other) are listed in a particular order. Exchange rates are always given in the same direction. So for instance, the currency pair for the dollar vs. the Canadian dollar is given as USD/CAD. The dollar comes first, making it the base currency. It's the currency that will be the "1" in whatever ratio is given. So if you see USD/CAD trading at 1.30, you know that means one U.S. dollar to 1.30 Canadian dollars.

There's a pecking order to the currency pairs. Euro always comes first...it's always the base currency when compared to another currency. The British Pound is next...it's the base currency against any other currency, except the Euro.
The U.S. dollar is next in line of precedence (generally speaking), but there are quirks to the system. When the U.S. dollar trades against the Australian or New Zealand dollars, for instance, the Aussie or Kiwi is typically given as the base currency. It's, um...not a completely logical system.

Related or Semi-related Video

Finance: What is an Exchange Rate?358 Views

00:00

Finance a la shmoop what is an ex change rate? alright I give you two cleary's for

00:09

one cat eye you give me to come quat's for one banana with the peel on this [Person trades come quats for banana]

00:15

time thank you I give you forty two thousand three

00:17

hundred eighty two dollars for this new Ford Hemi truck with the awooga horn yep

00:23

these are all exchange rates marbles for marbles fruit for fruit and well dollars

00:29

for trucks with awooga horns in place just do what you know... people off well in

00:34

more common financee parlance exchange rates focus on the trading back and

00:40

forth of national currencies while each country or region generally has its own [Selection of currencies appear and man holding an Uzi]

00:45

currency printing more of that currency lets the government pay its bills more

00:50

easily if it's not collecting enough dough in taxes but if it prints too much

00:55

of that currency well then it falls in value relative to the currencies of

01:00

other countries think about that you print lots of dollars and you have lots

01:04

of debt well then it's easy to pay back your debt right but if you do that too [Money transfers into debt]

01:08

long people don't trust your currency and then it creates all kinds of havoc

01:12

when you want to trade with them well when all that happens and it's volatile

01:15

currencies back and forth the goods of the inflated country seem cheap to other

01:21

countries and in theory well then they buy more stuff from the country that's [Other countries trading from inflated country]

01:26

got cheap currency and it makes it much more expensive for the inflated currency

01:30

country to then buy more from the we don't print too much currency country

01:38

one euro cost about two US dollars when it first came out in the early 90s a

01:44

nice hotel that was 250 a night in Paris cost a US currency holder about 500

01:51

bucks right like it was 250 euros it was 500 US dollars pay for that same hotel

01:56

so you can imagine there were not a whole lot of US tourists anxious to rent

02:00

Hotel nights from Rue de la blah blah blah but when Europeans looked at buying [eBay website appears]

02:05

american-made speedo swimsuits oh yeah they were cheap and clearly too many

02:11

Europeans bought them but then the euro fell into closer parity with the US

02:16

dollar in part because faith in their economic union fell and because the US

02:21

appeared to be printing money at a slower pace than worthy Europeans and

02:26

the public kind of wanted US dollars instead of euros because they thought

02:31

the US a little bit more secure so what happened well the relative

02:35

inflation of the US was in better shape than that of Europe

02:39

so today the exchange rate after a long time decades is now about one to one [Man discussing exchange rates]

02:44

meaning one US dollar buys you about one euro and same vice versa yeah so

02:51

you'd say that the rate of euros to dollars is about even and coincidentally

02:55

a US dollar buys you about 100 new Japanese yen and a US dollar buys about

03:02

600,000 Zimbabwean dollars and let's see US dollar also buys fourteen thousand

03:09

galleons if you know you're vacationing at Hogwarts lovely time [Hogwarts castle appears]

Up Next

Finance: What is a Dual Currency Bond?
33 Views

What is a Dual Currency Bond? Multinational corporations often find their books filled with foreign currencies from countries where they have busin...

Finance: What is Inflation: Adjusted, Hyper, Currency, Commodity?
22 Views

What is inflation, and if we poke it with a pin, will it pop?

Find other enlightening terms in Shmoop Finance Genius Bar(f)