The US Dollar remains the world’s leading currency. There are several reasons for this: the Dollar is the world’s main reserve currency, most commodities are primarily denominated in Dollars (oil, gas, coffee, gold, etc), and the United States remains the most liquid capital market in the world. The list goes on.
Currencies are quoted as “Currency A is worth X units of Currency B”. The convention is to put Currency A first in the currency pair, such that “USD-JPY” is read as “the value of one Dollar in units of Japanese Yen”.
Expressed as a fraction, this rule yields JPY divided by USD or JPY/USD. So, while professionals will say “USD-JPY”, others might be tempted to talk in terms of the fraction and say something like “JPY-USD”.
Another way of putting this is to read the currency pair as: “CURRENCY 1 IN (units of) CURRENCY 2”. Thus, USD-CHF becomes: “Dollar in Swiss Francs”, which is understood as being the value of one USD in units of Swiss Francs.
Knowing this convention becomes particularly important when quoting cross currencies, i.e., currency pairs where no Dollars are involved.
The first currency is sometimes called the “base currency” and both bid and offer refer to that currency.
European Quote
The European Quote is expressed as the value of one Dollar in units of the foreign currency. USD-CHF is an example of a European quote.
American Quote
The American Quote is expressed as the Amount of Dollars needed for one unit of the foreign currency. Occasionally, it can be expressed as the amount of Dollars needed for 100 units of the foreign currency, in cases where the foreign currency value per units is very low. GBP-USD is an example of an American quote.
Only EUR, GBP, AUD and NZD are quoted this way globally.
Reuters RIC Codes
Reuters is still the dominant market information system for the FX market. The Reuters codes for currencies vs. the USD (“Reuters RIC Codes”) are three-letter abbreviations (ISO codes) of the non-USD currency – the USD is implicit. Example: “CHF=”, meaning USD-CHF, or “GBP=” meaning GBP-USD. For this reason it is important to know the four currencies above that are quoted the American way. Bloomberg uses these codes but omits the “=” sign.
Cross Quotes
There is no “European” or “American” Quote, because for a cross such as Singapore vs. Hong Kong Dollars, neither of the two currencies can be said to be the “leading” currency. However, the overall quoting principle still applies: The price can be as SGD-HKD = One SGD in units of HKD, or HKD-SGD = one HKD in units of SGD. Knowing which is which is important!
Crosses on Reuters and Bloomberg are quoted in full, and confirm to this convention. Example: “EURGBP=” in the case of Reuters or “EURGBP” in the case of Bloomberg.
Because of differences in local markets, crosses may be quoted either way. For example, in the U.S. Swiss Francs against Japanese Yen is quoted as CHF-JPY, but in Switzerland the same cross is usually quoted the other way around, as JPY-CHF.
Bid / Offer Spreads
One of the attributes of a currency price quote is the “spread”, i.e., the difference between bid (the price that the market maker are willing to pay for the first currency) and the offer (the price at which the market maker would be wiling to sell it). The spread will vary according to a number of circumstances.
Spreads are wider in illiquid markets.
Very large amounts are more difficult to trade in the market, and the trader takes on more price risk when quoting for a large sum.
Transaction Costs: Regardless of size, there is a minimum cost associated with processing and settling a currency trade. This “fixed cost” becomes a significant factor for very small trades. A wider bid-offer spread is often used to recoup at least some of the cost of processing such trades.
Forex Market - Spot Quote Conventions
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