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Definition: Base Currency
Base Currency is the domestic currency from which gains and losses for international operations are calculated. In foreign exchange trading, currencies are quoted in relations to a currency pair. The base currency is the first currency in this pair. It is the currency from which a foreign exchange rate is derived. It is sometimes also referred to as the “primary currency”.
The base currency is the first currency listed in the currency pair in foreign exchange. The currency pair is used in foreign exchange when value of one currency is found by its comparison to the another currency.
The base currency is also considered to be currency used by companies to report their financial reports. Thus, if a U.S. company has an Indian subsidiary, it must first convert the financial statements of the subsidiary (which are likely reported in rupees) into dollars, and then consolidate the financial reports with the parent company, which are stated in the base currency. In currency pair it shows how much of the quote currency i.e. the second currency is needed to purchase one unit of base currency. So the base currency is assigned the value 1 when exchange rate is calculated. The U.S. dollar is usually given the status of base currency since it is a dominant as well as stable currency in the world economy.
Example: If we look at the Rupee USD pair, Rupee is the base currency. If 1 INR =0.015 USD, the Indian national Rupee is the base currency in terms of which the exchange rate for Dollar is determined.
If it is given that 1 USD= 66.11 INR, then Dollar is the base currency and exchange rate is determined based on dollar.