Currencies are always quoted as how much one unit of one currency (base currency) costs in another currency (quote currency). The most commonly used pricing convention ranks base currencies in the following order of priority: euro (EUR), British pound (GBP), Australian dollar (AUD), New Zealand dollar (NZD), U.S. dollar (USD), all other currencies. Lets take two commonly quoted currencies: the euro and the Japanese yen (JPY). Taking the above pricing convention order of priority, relative to the USD, the price quotes would be as follows: EUR/USD and USD/JPY. In plain English, this translates to: “how many U.S. dollars buys one euro” and “how many Japanese yen buys one U.S dollar”.
This may help to explain why, when the quoted price of the Japanese yen (vs. USD) moves from 90 to 95, the yen actually declines in value – because it now costs more yen to purchase one U.S. dollar (a stronger USD). Conversely, when the quoted price of the euro (vs. USD) moves from 1.40 to 1.45, this would represent a stronger euro, as it now costs more U.S. dollars to purchase one euro (a weaker USD).
To keep informed, and be updated when we post another Currencies Uplugged, please subscribe to our newsletter, Merk Insights.
