Direct Quote

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Direct Quote

A direct quote expresses an exchange rate as the amount of domestic currency required to buy one unit of foreign currency. In a direct quote, the foreign currency is the base currency and the domestic currency is the quote (or counter) currency. Which currency is “domestic” depends on the location of the trader or the convention being used.

How direct quotes work

  • Notation: base/quote (e.g., EUR/USD). A direct quote shows quote currency per one unit of base currency.
  • Interpretation: an increase in a direct quote means the domestic currency is weakening (it takes more domestic units to buy one unit of foreign currency); a decrease means the domestic currency is strengthening.
  • Reciprocal relationship: a direct quote and an indirect quote are reciprocals.
  • DQ = 1 / IQ

Example: If USD/JPY (direct) moves from 100 to 105, it means it now takes 105 yen to buy 1 U.S. dollar, i.e., the yen has weakened versus the dollar.

Market conventions and common examples

  • U.S. dollar (USD): Because USD is the most traded currency, many market quotes use the dollar as the base or reference. A direct quote in the U.S. might be written as $1.17 CAD/US$ (meaning $1.17 Canadian per US$1).
  • British pound (GBP): Historically quoted against other currencies as pounds per unit (e.g., $1.45 per £1), reflecting legacy convention.
  • Euro (EUR): The euro is typically quoted as the base currency (quotes show the number of dollars, pounds, francs, or yen per €1).

Alternatives and related quotes

  • Indirect quote: Shows how much foreign currency one unit of domestic currency can buy (the reciprocal of a direct quote).
  • Cross rates: Exchange between two non-domestic currencies derived from their rates versus a common currency. Example: if USD/GBP = 0.75 and USD/JPY = 110, then GBP/JPY ≈ 110 / 0.75 = 146.67.
  • Bid and ask: The bid is the price buyers will pay; the ask is the price sellers will accept. Both can be quoted in direct or indirect terms.
  • Forward rates: Agreed exchange rates for transactions set today but executed on a future date; can be given as direct quotes for that future date.

Quick FAQs

  • How is a direct quote different from an indirect quote?
    A direct quote expresses domestic currency per unit of foreign currency; an indirect quote expresses foreign currency per unit of domestic currency.

  • Why use direct quotes?
    They simplify understanding the domestic cost of purchasing foreign currency and align with market or regional conventions.

  • How do you convert a direct quote into an indirect quote?
    Take the reciprocal. Example: a direct quote of $1.10/€ → indirect = 1 / 1.10 ≈ €0.909/$1.

Bottom line

A direct quote shows how much domestic currency is needed to buy one unit of foreign currency. It provides a straightforward way to compare and transact in foreign exchange, and conventions (USD, GBP, EUR) determine which currency is typically used as the base in market quotes.