What Is a Direct Quote?

A direct quote represents a fundamental concept in the world of foreign exchange trading. It denotes an exchange rate expressed in fixed units of a foreign currency against variable amounts of the domestic currency. In simpler terms, a direct currency quote reveals how much of the domestic currency is required to purchase one unit of the foreign currency, often denoted by the U.S. dollar (USD) in the realm of forex markets. Here, the foreign currency serves as the base currency, while the domestic currency acts as the counter currency or the quote currency.

In contrast, an indirect quote presents the price of the domestic currency in relation to a foreign currency, highlighting how much of the domestic currency one would receive by selling one unit of the foreign currency. Moreover, a quote involving two foreign currencies, excluding the USD, is termed a cross currency quote.

Key Takeaways:

• A direct quote articulates a currency pair quote where the foreign currency is displayed in per-unit terms of the domestic currency.
• It determines the quantity of local currency essential to acquire one unit of foreign currency.
• While the USD commonly serves as the base currency in most direct quotes due to its widespread trading prevalence, exceptions like the British pound and the euro exist.

Understanding Direct Quotes

The choice between direct and indirect quotes depends on the requesting trader’s location, determining which currency is domestic and which is foreign within the pair. Typically, non-business publications opt for direct foreign exchange rate quotations for consumer ease; however, the forex market operates on quoting conventions that surpass geographical boundaries.

In a direct quote, a rising exchange rate signifies a depreciation or weakening of the domestic currency, as the price of the foreign currency increases, and vice versa. For example, a USD/JPY direct quotation shift from 100 to 105 implies yen depreciation against the dollar, illustrating that it now takes 5 more yen to buy 1 USD.

U.S. Dollars

The U.S. dollar (USD) stands as the most actively traded currency globally. In trading environments and professional literature, most currencies get quoted as the number of foreign currency units against the dollar. Therefore, the dollar acts as the base currency, regardless of whether the speaker is situated in the U.S. or abroad.

For instance, a direct quote using U.S. dollars might read as $1.17 Canadian per U.S. dollar, as opposed to 85.5 U.S. cents per Canadian dollar, which represents the indirect quote.

British Pounds

An exception to the dollar-based quote norm arises with the British pound (GBP) when quoted against various currencies, notably the dollar but excluding the euro. This exception stems from the pound’s historical dominance before the U.S. economy’s rise in the pre-World War II era.

Consequently, the pound’s exchange rate gets quoted as $1.45 per £1, irrespective of whether it is considered direct in the U.S. or indirect in the U.K.

Euros

The euro (EUR) emerged on Jan. 1, 1999, as the official unit of account for participating European Union member nations, with physical notes and coins entering circulation on Jan. 1, 2002. Functioning as the successor to various traded European currencies like the German mark and the French franc, the euro was introduced to solidify the currency’s prominence within the financial markets.

Under the European Central Bank’s jurisdiction, which managed the conversion, the euro is always the base currency in trading scenarios, even concerning its valuation against the dollar and pound. Consequently, quotes reflect the number of dollars, pounds, Swiss francs, or Japanese yen needed to purchase €1.