Two meanings of base currency
Base currency is used in two different senses in foreign exchange, and conversations go wrong when people mean different ones.
In the first sense, the base currency is the first currency in a quoted pair. In EUR/USD 1.1000, the euro is the base and the US dollar is the quote, or terms, currency. The rate tells you how many units of the quote currency buy one unit of the base. One euro costs 1.1000 dollars.
In the second sense, a firm's base currency is the currency in which it keeps its books, holds its capital and measures its position. A bank in Frankfurt has a euro base. A Canadian exporter has a Canadian dollar base. When an FX provider says it uses the euro as its base currency, it usually means this second sense: its own accounts, its liquidity and its pricing are organised around the euro, and other currencies are priced against it.
Both meanings overlap more than you might expect, because the euro also sits at the top of the market's quoting conventions.
How the market orders currencies
The interbank market follows a hierarchy when deciding which currency comes first in a pair. The euro is at the top. Below it, by convention, come sterling, the Australian dollar, the New Zealand dollar, the US dollar, the Canadian dollar, the Swiss franc and the Japanese yen. Any pair involving the euro is quoted with the euro first: EUR/GBP, EUR/USD, EUR/CAD, EUR/PLN, EUR/HKD.
That is why you will see EUR/GBP quoted at around 0.85 rather than GBP/EUR at around 1.18. Both describe the same relationship. The market simply agrees on one way of writing it so that everyone is looking at the same number.
For a client, the convention mostly matters when reading quotes. If you are used to thinking in pounds per euro and your provider quotes euros per pound, a rate can look badly wrong when it is simply inverted. Always check which currency is the base in the quote in front of you.
Why a provider might work from the euro
The euro is the second most traded currency in the world after the US dollar. It has deep liquidity against all the major currencies and against the currencies of Central and Eastern Europe, including the Polish zloty, the Czech koruna and the Hungarian forint. For a provider with European banking relationships and European clients, organising its book around the euro is a natural choice.
There are practical reasons too. If most of a provider's flows involve the euro on one side, holding its working liquidity in euros reduces the number of conversions it has to make for itself. Its own accounting is simpler. Its exposure is measured against one currency. Many of its clients receive or pay euros in any case, so the most common trades are direct pairs with no extra step.
For clients, a euro base also tends to mean that euro pairs are the provider's most practised trades. The dealers watch EUR/USD, EUR/GBP and EUR/PLN all day, know how those markets behave around European data releases, and are used to the payment routes for euro settlement. That familiarity is hard to measure, but it shows in the quality of the quotes during busy or nervous markets.
None of this means a euro-based provider cannot handle trades that do not involve the euro. It means those trades are priced as crosses, and it helps to understand what that involves.
How cross rates are built
A cross rate is the exchange rate between two currencies, derived from each currency's rate against a third. If you know how many zloty one euro buys and how many pounds one euro buys, you can work out how many zloty one pound buys.
The arithmetic depends on where the common currency sits. When the euro is the base of both legs, as with EUR/GBP and EUR/PLN, you divide one by the other:
- EUR/PLN 4.2500 means one euro buys 4.2500 zloty.
- EUR/GBP 0.8500 means one euro buys 0.8500 pounds.
- GBP/PLN is therefore 4.2500 divided by 0.8500, which is 5.0000. One pound buys five zloty.
When the common currency is the base of one leg and the quote of the other, you multiply. If GBP/EUR were quoted at 1.1765 and EUR/PLN at 4.2500, GBP/PLN would be 1.1765 multiplied by 4.2500, which is about 5.0001. The small difference from 5.0000 is rounding.
In the wholesale market, many crosses are actively traded in their own right, and others are built through the US dollar because it is the most liquid hub. A euro-based provider builds its crosses through the euro. For pairs where both currencies trade well against the euro, such as GBP/PLN or CHF/PLN, this is efficient. For pairs where neither currency trades heavily against the euro, the route matters more.
Why crosses carry a wider spread
Each leg of a cross has its own bid and offer. When you deal a cross, you are effectively doing two trades, so you cross two spreads. The cross spread is wider than either leg on its own.
Here is an illustrative calculation with hypothetical prices:
- EUR/GBP 0.8500 / 0.8502
- EUR/PLN 4.2500 / 4.2520
To sell pounds for zloty, you sell pounds to buy euros, paying the EUR/GBP offer of 0.8502, then sell those euros for zloty at the EUR/PLN bid of 4.2500. The GBP/PLN bid is 4.2500 divided by 0.8502, about 4.9988.
To buy pounds with zloty, you reverse the route: buy euros with zloty at the EUR/PLN offer of 4.2520, then sell euros for pounds at the EUR/GBP bid of 0.8500. The GBP/PLN offer is 4.2520 divided by 0.8500, about 5.0024.
The cross spread is therefore about 36 zloty pips, against 20 pips on EUR/PLN and 2 pips on EUR/GBP. That is simply how crosses behave, whoever prices them. It is why a GBP/PLN conversion of a given size will usually cost a little more, as a percentage, than a EUR/PLN conversion of the same size.
A worked example with the Hong Kong dollar
This example uses hypothetical rates for illustration only.
A Canadian company with a Hong Kong office needs to convert US dollars into Hong Kong dollars to pay local rent. Neither currency is the euro. A euro-based provider prices USD/HKD through EUR/USD and EUR/HKD.
- EUR/USD mid 1.1000
- EUR/HKD mid 8.5580
- USD/HKD mid is 8.5580 divided by 1.1000, which is 7.7800
That result sits inside the Hong Kong dollar's convertibility band of 7.75 to 7.85 per US dollar, as it should. Because the HKD is pegged to the USD, EUR/HKD moves almost in step with EUR/USD, so the two legs largely offset each other's movements. The cost to the client comes mainly from the two spreads and the provider's margin, rather than from any mismatch in the legs. Our guide to the Hong Kong dollar peg explains why USD/HKD stays in such a narrow range.
When the base currency matters to you
For many clients the provider's base currency is invisible. It becomes relevant in a handful of situations.
- You convert between two non-euro currencies often. Check how the provider prices the cross and compare the all-in cost with a direct quote elsewhere, on the same terms.
- You deal in Central and Eastern European currencies. These trade most actively against the euro, so a euro-based book can suit you well.
- Your own base currency is the euro. Your common trades are direct pairs, and your reporting lines up with the provider's.
- Your quotes look inverted. Confirm which currency is the base in each quote, especially when moving between providers.
- You reconcile at month end. If your provider reports in euros and you report in Canadian dollars or Hong Kong dollars, agree how amounts will be shown on statements.
When it makes little difference
If you convert euros into another currency, or another currency into euros, the provider's euro base has no effect on your rate beyond normal pricing. The trade is a direct pair with one spread.
If you convert between two very liquid currencies, such as US dollars and Canadian dollars, the cross adds a modest amount of spread because both legs are deep. The difference may be smaller than the variation between providers on the margin itself.
And for occasional, small conversions, the difference between routing through the euro and routing through the dollar is usually lost in the fixed costs of the payment. The base currency question is worth asking when volumes are significant and regular, which is exactly when an all-in cost comparison is worth doing anyway.
Practical tips for reading quotes
A few habits prevent most misreadings.
- Read the pair aloud as "one unit of the first currency costs this many units of the second".
- Check the counter amount on the quote, not just the rate. If you expect to pay about 225,000 Canadian dollars and the quote shows 100,000, you have the pair the wrong way round.
- When you compare providers, convert every quote into the same orientation before comparing.
- For crosses, ask which legs were used. It helps you understand why a quote is wider than you expected.
- Record the confirmed rate exactly as shown on the confirmation. Inverting it in your own system introduces rounding differences that show up in reconciliations.
General information
This article is general information about base currencies and cross rates. It is not investment advice and does not recommend any course of action. All rates shown are hypothetical. CCYFX quotes spot FX with the euro as its base currency and prices other pairs as crosses. See our foreign exchange page for the currencies we handle.
