What Is a Reciprocal Currency?
A reciprocal currency in the foreign exchange (forex) market refers to a scenario in which a currency pair includes the U.S. dollar (USD), but the USD is the quotation currency rather than the base currency (also known as the counter currency).
As a result, a reciprocal currency is priced in terms of U.S. dollars per foreign currency unit rather than dollars per foreign currency unit. The EUR/USD currency pair is a typical illustration, where a quotation of 1.20 indicates that one euro is equivalent to $1.20 in USD.
Reciprocal currency knowledge
The U.S. dollar is often used as the base currency in USD currency pairings, and it always appears first in an FX quotation. Consider the USD/JPY or the USD/CAD exchange rates as examples (dollar versus the Canadian dollar).
It would state how many units of a foreign currency one US dollar might purchase in such a quotation. A dollar may purchase 3.25 shekels, for instance, if the quotation for the Israeli shekel (USD/ILS) is 3.25.
The base currency for reciprocal currencies, which is a currency other than the U.S. dollar, is stated instead in what are known as “European” terms.
Thus, currency pairings utilized in the foreign exchange market when the USD and another currency are matched, but where the USD is not the first currency quoted, are referred to as “reciprocal currency.”
The major currency pairings EUR/USD (euro to US dollar), GBP/USD (british pound to US dollar), and AUD/USD all include the USD but do not use it as the base currency (Australian dollar to U.S. dollar).
An Illustration of Reciprocal Money
An example of a reciprocal currency would be the NZD/USD quotations. The New Zealand dollar serves as the base currency for this currency pair, while the US dollar serves as the quote currency.
In other words, the New Zealand dollar would be compared to the US dollar when quoting the NZD/USD exchange rate. In other words, if the NZD/USD price is 0.70, it signifies that one NZD may be exchanged for 70 cents, U.S.
Despite the fact that the euro is designated as the base currency, the EUR/USD exchange rate is also presented in terms of dollars. When quoting a rate, a trader could indicate the euro/U.S. rate is $1.15 even if the EUR/USD rate may be $1.15 to 1 euro.
A Reciprocal Currency Agreement: What Is It?
An agreement between two countries to maintain a specified amount of each other’s currencies’ money supply is known as a reciprocal currency arrangement. This increases financial markets’ liquidity across countries and globally, enables more efficient financial transactions, upholds reserve requirements, and determines currency rates. Swap lines are another name for agreements involving reciprocal currencies.
How Do Currency Pairs Work?
A currency pair quotes the values of two different currencies, one of which is quoted against the other. The base currency in a pair is the first stated currency, while the quoted currency is the second. Currency pairings show the ratio of the quote currency to the base currency that is required to purchase one unit of each.
How Can You Determine the Relative Exchange Rate?
The inverse of the exchange rate would be a reciprocal exchange rate. For the opposite connection, you would divide 1 by the two currencies’ current exchange rates. For instance, if the USD/EUR exchange rate was 0.89, you would do the following computation to get the EUR/USD reciprocal conversion rate: To get to 1.12, divide by 0.89.
Which Two Methods Are Used to Quote a Currency?
Both direct and indirect quotes of currencies are acceptable. When one unit of a foreign currency is quoted in the equivalent units of the home currency, this is known as a direct quotation. When one unit of a local currency is quoted in terms of the corresponding foreign currency, this is known as an indirect quotation.
How Are Options on Foreign Currencies Quoted?
The intrinsic value and the temporal value are used to price foreign exchange options. The FX option premium is this. The difference between the converted currencies using the strike rate and forward rate called the intrinsic value.
Conclusion
A currency pair in which the USD is not the base currency but rather the counter currency is known as a reciprocal currency in foreign exchange trading. It is expressed as US dollars per foreign currency unit. Reciprocal currencies, such as EUR/USD, GBP/USD, and AUD/USD, play a significant role in worldwide FX trading.
