How Spot Rates are Quoted

There is a Buying Price and a Selling Price In the foreign exchange market there are always two prices for every currency—one price at which sellers of that currency want to sell, and another price at which buyers want to buy.

A market maker is expected to quote simultaneously for his customers both a price at which he is willing to sell and a price at which he is willing to buy standard amounts of any currency for which he is making a market.

How Spot Rates are Quoted: Direct and Indirect Quotes, European and American Terms Exchange rate quotes, as the price of one currency in terms of another, come in two forms: a “direct” quotation is the amount of domestic currency (dollars and cents if you are in the United States) per unit of foreign currency and an “indirect” quotation is the amount of foreign currency per unit of domestic currency (per dollar if you are in the United States).

The phrase “American terms”means a direct quote from the point of view of someone located in the United States. For the dollar, that means that the rate is quoted in variable amounts of U.S. dollars and cents per one unit of foreign currency (e.g., $0.5774 per DEM1).
The phrase “European terms”means a direct quote from the point of view of someone located in Europe. For the dollar, that means variable amounts of foreign currency per one U.S. dollar (or DEM 1.7320 per $1).

In daily life,most prices are quoted “directly,” so when you go to the store you pay x dollars and y cents for one loaf (unit) of bread. For many years, all dollar exchange rates also were quoted directly. That meant dollar exchange rates were quoted in European terms in Europe, and in American terms in the United States.

However, in 1978, as the foreign exchange market was integrating into a single global market, for convenience, the practice in the U.S. market was changed—at the initiative of the brokers community—to conform to the European convention.

Thus, OTC markets in all countries now quote dollars in European terms against nearly all other currencies (amounts of foreign currency per $1). That means that the dollar is nearly always the base currency,one unit of which (one dollar) is being bought or sold for a variable amount of a foreign currency.