What is a Base Currency?

A base currency is the first currency listed in a foreign exchange quote. For example, if a quote is stated as GBP/USD, the quote states the number of U.S. dollars that will be required to purchase one British pound. In this quote example, the pound is the base currency. The second currency stated in the quote is called the quote currency. In this currency pairing, the value of the base currency is expressed as 1 unit, while the quote currency’s value can fluctuate relative to the base currency.

The U.S. dollar is frequently used as the base currency, since it is the dominant currency in the world economy, and so is most frequently used to pay for transactions.

The Base Currency in Financial Reporting

The base currency is also considered to be the currency used by a business entity to report its financial statements. Thus, if a U.S. company has a Japanese subsidiary, it must first convert the financial results of the subsidiary (which are likely reported in yen) into dollars, and then consolidate the results with those of the parent company, which are stated in the base currency.