What is a ‘Direct Quote’
A direct quote is a foreign exchange rate quoted as the domestic currency per unit of the foreign currency. In other words, it involves a quote in fixed units of foreign currency against variable amounts of the domestic currency. As of February 2018, a direct quote of the U.S. dollar against the Canadian dollar in the United States would be U.S. $0.79394 = C $1 while in Canada, a direct quote for would be C $1.25953 = U.S. $1.
BREAKING DOWN ‘Direct Quote’
The concept of direct quotes versus indirect quotes depends on the location of the speaker, as that determines which currency in the pair is domestic and which is foreign. Non-business publications and other media usually quote foreign exchange rates in direct terms for the ease of consumers. However, the foreign exchange market has quoting conventions that transcend local borders.
A direct quote can be calculated using the following formula:
DQ = 1/IQ
- DQ = Direct Quote
- IQ = Indirect Quote
The U.S. dollar is the most actively traded currency in the world. In the context of trading rooms and professional publications, most currencies are quoted as the number of foreign currency units per dollar. This means that the dollar serves as the base currency, whether the speaker is in the United States or elsewhere. A standard trading price would be $1.17 Canadian per U.S. dollar rather than 85 U.S. cents per Canadian dollar.
A major exception to the dollar-base quote rule is when the British pound is quoted against other currencies, including the dollar, but with the exception of the euro. This reflects the fact that the pound was the world’s dominant currency in the years leading up to World War II and before the ascendancy of the U.S. economy.
The exchange rate for the pound would thus be quoted as $1.45 for £1, regardless of whether this is considered direct (in the United States) or indirect (in the United Kingdom).
The euro came into existence on Jan. 1, 1999 as the unit of account for the member nations; notes and coins were first issued on Jan. 1, 2002. The euro replaced many major traded European currencies including the German mark, the French franc and the Dutch guilder. The European Central Bank, which oversaw the conversion, intended the currency to be the financial market’s dominant currency. For this reason, it specified that the euro should always be the base currency whenever it is traded, including against both the U.S. dollar and the British pound. For this reason, quotes are always the number of dollars, pounds, Swiss francs or Japanese yen needed to buy €1.