What is a Direct Quote?
A direct quote is a foreign exchange rate quoted in fixed units of foreign currency in variable amounts of the domestic currency. Essentially, it tells you how much of your home’s currency you need to purchase one unit of the foreign currency, typically shown with currency pairs where USD is prevalent.
In a direct quote, the foreign currency is the base currency, while the domestic currency acts as the counter currency or quote currency. This sets it apart from an indirect quote, where domestic currency is expressed in terms of a foreign currency. If a quote involves two non-USD currencies, it’s referred to as a cross currency quote.
Key Takeaways
- A direct quote exposes the value of a foreign currency per unit in terms of the domestic currency.
- Knowing a direct quote, you get the specific amount of local currency needed to buy one unit of foreign currency.
- Given the extraordinary trading volume of the USD, it mostly serves as the base currency in direct quotes, with exceptions like the British Pound and Euro.
Understanding Direct Quotes
Direct quotes are used to specify the relationship between foreign and domestic currencies. This differentiation largely depends on where the trader or consumer is based. For casual and media use, direct quotes make understanding simpler but, in forex markets, quoting norms superar nacional frontiers.
A direct quote is the inverse of an indirect quote, portrayed through this formula:
DQ = 1/IQ
Where:
- DQ = Direct Quote
- IQ = Indirect Quote
When you see a higher exchange rate in a direct quote, it means that your domestic currency is weakening because it will require more of the local currency to buy one foreign unit. For example, if the USD/JPY quote shifts from 100 to 105, that indicates the Yen is weakening as you now need 105 Yen (home currency) to buy 1 USD (foreign currency).
U.S. Dollars (USD)
The U.S. Dollar ( USD) ranks as the most traded currency globally. Professional traders and financial publications often present currencies quoted as the number of foreign currency units against one Dollar, no matter the trader’s location, specifying the USD as the base currency.
Example: A direct quote might show as $1.17 CAD per USD, rather than 0.855 USD per CAD, which would be an indirect quote.
British Pounds (GBP)
Exempt from the dollar-based quote rule is when Britain’s currency, the Pound ( GBP), pairs with others. This historic norm comes from the British Pound’s pre-WWII global dominance before the U.S. economy flourished.
Example: The Pound often shows as $1.45 per GBP, no matter whether this is a direct (in the USA) or indirect (in the UK) quote.
Euros (EUR)
Introduced on January 1, 1999, the Euro ( EUR) unified several prominent European currencies under one unit on January 1, 2002—a directive unfulfilled by the ECB. It’s strategized to stand strong in EU and international markets. Importantly, the Euro stays the base currency in quotes, needing you to account how other currencies align.
Example: With EUR as the base, quotes might show the amounts of USD, GBP, CHF, or JPY needed to buy €1.
Related Terms: indirect quote, exchange rate, base currency, quote currency.
