The Currencies Exchange Rate has many names. For example the “foreign exchange rate”- Forex rate FX rate and so on. Ultimately, no matter what name it goes under, the Currencies Exchange Rate refers to one thing: the exchange rate between two currencies.
You have probably asked yourself many questions about the Currencies Exchange Rate. How do I read a Currencies Exchange Rate quotation? Which is the Base currency and which is the Term currency? Why the Currencies Exchange Rate fluctuates? We will answer these questions for you in the following paragraphs.
How do I read a Currencies Exchange Rate quotation? The quotation is given by stating the number of units of “term currency” or “price currency” that can be bought in terms of 1 unit “base currency”. That is in a quotation that reads EUR/USD 1.5 (i.e. 1.5 USD per EUR), the “term currency” is USD and the “base currency” is EUR.
Which is the Base currency and which is the Term currency? To determine this there is a market convention. The order is: EUR > GBP > AUD > USD. Thus if you are converting from EUR into AUD, EUR is the Base currency, AUD is the Term currency. This exchange rate tells you how many Australian dollars you would pay or receive for 1 Euro. There are some exceptions to this rule; one example is in Japan, which always quotes its currency as the base to other currencies.
Why the Currencies Exchange Rate fluctuates? The exchange rate is market based and prices will change whenever the values of either one of the two component currencies change. More importantly a currency will appreciate whenever demand for it will increase beyond available supply.