Have you seen the three-letter currency code that is separated by a slash, like USD/ INR? This is called a currency pair. The concept of currency pairs lets you understand how currencies interact with each other in FX markets. It is a price quote of two different currencies traded for investment and international trading. Read this blog further to know the meaning and types of currency pairs.
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What is a Currency Pair?
A currency pair is a price quotation of the relative value of one currency against one unit of another currency in a foreign exchange market. It is written with a three-letter alphabetic code for each currency separated by a slash. For example, USD/ EUR. These codes are identified by an ISO currency code.
The given pair, USD/ EUR represent the US Dollars (USD) compared to the Euros (EUR). A currency pair has 2 components- base currency and quote currency.
- The first currency of a pair is called the ‘base currency’ (USD).
- The second currency is called the ‘quote currency’ (EUR).
A currency exchange rate tells you how much of the ‘quote currency’ you need to buy one unit of the ‘base currency’. If the exchange rate for USD/EUR is 1.20, it means you would need 1.20 US Dollars to buy 1 Euro.
Also Read: Fluctuating exchange rates can impact your budget. Learn all about currency hedging and lock currency exchange rates for future transactions, irrespective of the prevailing rate.
How Currency Pairs are Traded?
Currency pairs are traded in a foreign exchange market, also called a forex market. It is the biggest financial market in the world that lets you buy, sell, and exchange currencies for international trade and investments. You don’t trade currencies individually. Instead, you buy or sell a currency pair as a whole.
- The pairs are traded 24 hours a day and 5 days a week, including most holidays.
- All currency trading involves the buying of one currency and the sale of another currency.
- Buying currency in pairs in a forex market means buying the ‘base currency’ and selling the ‘quote currency’.
- Similarly, selling a pair in a forex market means selling the ‘base currency’ and receiving the ‘quote currency.’
It is similar to stock trading where you use cash to buy certain units of shares of a particular stock. However, in currency trading, you are trading currencies. If you believe the Euros will become more valuable compared to the US Dollar, you might trade the EUR/USD pair. The intention is to sell it later for a profit when the EUR strengthens.
Currency Pairs and International Students
Being international students, currency pairs can help you understand currency exchange rate calculations. You can plan your expenses more efficiently and accurately as currency pairs help you compare the prices of your home currency with the value of foreign currency. This lets you make informed decisions about where and how to spend your money.
- Understanding currency fluctuations can help you anticipate the amount of international wire transfers.
- You can find ways to identify how much currency you can receive from home or how much it costs to send money back.
- The pairs introduce you to the world of finance and forex. You can learn about concepts such as international trade and forex gains via investments.
Also Read: Want to save money on forex transactions? Check out the blog on best forex tips for international students that allows you to plan your study abroad budget efficiently.
Types of Currency Pair in Forex
The foreign exchange market trades a vast number of currency pairs. These are major and minor currency pairs. The most actively traded pairs are called major currency currencies, and currency pairs that are less traded are called minor currency pairs. Check the details-
Major Currency Pairs
Major currency pairs are the most actively traded currencies. They typically involve USD paired with major other currencies of the world like Euros, Japanese Yen, Great Britain Pound, Swiss Franc, etc.
- They are highly liquid currency pairs, meaning they offer ease of buying and selling.
- The EUR/USD currency pair is the most liquid in the world. The second most popular currency pair is the USD/ JPY.
- There are 7 major currency pairs in Forex-
- EUR/ USD (Euro/ Dollar currency pair)
- USD/ JPY (Dollar/ Japanese Yen)
- GBP/ USD (Great Britain Pound/ US Dollar)
- USD/ CHF (US Dollar/ Swiss Franc)
- AUD/ USD (Australian Dollar/ US Dollar)
- USD/ CAD (US Dollar/ Canadian Dollar)
- NZD/ USD (New Zealand Dollar/ US Dollar)
Minor Currency Pairs
Minor currency pairs are less traded compared to major currencies. They don’t involve the US Dollars and are generally less liquid. Some examples of minor currency pairs include the EUR/GBP, GBP/JPY, and EUR/CHF.
- While minor currency pairs might offer greater profit potential due to higher volatility, they also come with increased risk.
Exotic Currency Pairs
Currency pairs of emerging markets are called exotic currency pairs. They are not very liquid pairs. For example- USD/ SGD (US Dollar/ Singapore Dollar currency pair).
This was all about currency pairs. To know more about education loans, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
FAQs
A currency pair is a three-letter alphabetic code for each currency separated by a slash. For example, USD/ EUR. It is a price quotation of the relative value of one currency against one unit of another currency in a foreign exchange market.
Currency pairs are traded 24 hours a day and 5 days a week, including most holidays. All currency pair trading involves the buying of one currency and the sale of another currency.
The EUR/USD currency pair is the most liquid in the world. The second most popular currency pair is the USD/ JPY.
The foreign exchange market trades a vast number of currency pairs. These are major and minor currency pairs.
Major currency pairs are the most actively traded currencies. The 7 major pairs are EUR/ USD, USD/ JPY, GBP/ USD, USD/ CHF, AUD/ USD, USD/ CAD, and NZD/ USD.
Minor currency pairs are less traded compared to major currencies. They don’t involve the US Dollars. Some examples of minor currency pairs include the EUR/GBP, GBP/JPY, and EUR/CHF.
Currency pairs of emerging markets are called exotic currency pairs. They are not very liquid pairs. For example- USD/ SGD (US Dollar/ Singapore Dollar currency pair).
