Currency Rates

Currency rates (also known as the exchange rates) are the price at which one nation’s currency is valued against another nation’s currency. It consists of two parts.

The base currency and the quote currency. The base is always valued at one, while the quote fluctuates.

For example, when observing the currency rate of the euro versus the US dollar, this will be written as EUR/USD, with the euro (EUR) being the base and the US dollar (USD) being the quote.

As mentioned, the base currency always has a value of one. So, if we see that the EUR/USD’s currency rate is 1.2000, the ratio of EUR/USD is 1:1.2000. I.e. 1 euro is equivalent to 1.2 US dollars.

Or if the euro vs the British pound (EUR/GBP) is trading at 0.7500, it means 1:0.7500, i.e. 1 euro is equivalent to 0.75 British pounds.

The base digit (of one unit) is generally not displayed by banks or forex brokers when quoting rates.

What Affects Currency Rates?

Exchange rates vary slightly depending on whether one is buying or selling.

Forex brokers will quote a “bid” price and an “ask” price, where if you’re selling (also known as going short), you’ll pay the bid price, and if you’re buying (also known as going long), you’ll pay the ask price.

Even though a real mid-market exchange rate exists, it’s never used by banks or brokers for their customers. The difference between the bid and ask prices is known as the spread.

Spreads between different brokers vary. Even among brokers that have very low spreads (often approaching zero for some of the major liquid pairs), it's required to pay a commission on trades.