Dollar falls after Democratic midterm sweep: base and quote currency

The US dollar fell broadly after Democrats swept Congress in the US midterm elections. In the European Central Bank's reference rates for 4 November, EUR/USD rose 0.79% to 1.1267, up from 1.1179 in the 3 November fixing.

Our last lesson covered the Aussie slipping after weak New Zealand jobs data. That picture has turned. Investing.com reports the dollar fell to a one-month low as the results triggered a move into safe havens, and Treasuries rallied as Democrats took Congress. investingLive's European session wrap says gold soared as the dollar tumbled. In the fixings, GBP/USD rose 0.66% to 1.3500, AUD/USD rose 0.45% to 0.7015, and USD/CHF fell 0.54% to 0.8155. Investing.com also reports that Deutsche Bank sees lower policy risk supporting the euro. US data mattered less: October ISM services came in at 54.5 against 54.8 expected, and investingLive noted no dollar reaction. Our sister site has a fuller market recap of the dollar's slide after the midterm sweep.

Here is a puzzle for beginners. The dollar fell, yet EUR/USD went up and USD/CHF went down. Both describe the same weaker dollar. The reason is the order of the currencies in the pair.

What is base and quote currency?

Every currency pair has two parts. The first currency is the base currency. The second is the quote currency. The price tells you how many units of the quote currency you need to buy one unit of the base currency.

• In EUR/USD, the euro is the base and the dollar is the quote. A rate of 1.1267 means one euro costs 1.1267 dollars.
• In USD/CHF, the dollar is the base and the Swiss franc is the quote. A rate of 0.8155 means one dollar costs 0.8155 francs.

The rule is simple. When the pair rises, the base currency gets stronger against the quote. When the pair falls, the base currency gets weaker. So a weaker dollar pushes pairs with the dollar as quote up, and pairs with the dollar as base down.

A worked example

Take the ECB fixings for 3 and 4 November.

EUR/USD (dollar is the quote):

1. 3 November: 1 euro = 1.1179 dollars.
2. 4 November: 1 euro = 1.1267 dollars.
3. Change: 1.1267 − 1.1179 = 0.0088 dollars more per euro.
4. On €10,000: 10,000 × 1.1179 = $11,179, and 10,000 × 1.1267 = $11,267. The same euros are worth $88 more.

Flip it to see the dollar's side. One dollar bought 1 ÷ 1.1179 = about 0.8945 euros on 3 November, but 1 ÷ 1.1267 = about 0.8875 euros on 4 November. The dollar buys less, so it weakened.

USD/CHF (dollar is the base):

1. 3 November: 1 dollar = 0.8199 francs.
2. 4 November: 1 dollar = 0.8155 francs.
3. On $1,000: 1,000 × 0.8199 = 819.90 francs, and 1,000 × 0.8155 = 815.50 francs. The same dollars now fetch 4.40 fewer francs.

One pair rose and the other fell, but the message is identical: the dollar lost ground. You can compare the two on EUR/USD and USD/CHF charts.

Why it matters for new traders

Headlines talk about currencies, but charts show pairs. If you read "dollar falls" and only see a chart going up, you can easily get the direction backwards. Before reading any move, ask: which currency is the base? Then the direction makes sense.

It also matters when you place a position. Buying a pair means buying the base and selling the quote. Buying EUR/USD is a bet on the euro against the dollar. Buying USD/CHF is the opposite kind of bet on the dollar.

Note that these are ECB reference rates, one official fixing per business day, not live quotes. Prices you see at a broker will differ through the day.

Key terms

• Base currency: the first currency in a pair; the price shows the cost of one unit of it.
• Quote currency: the second currency in a pair; the price is expressed in it.
• Reference rate (fixing): an official daily exchange rate, here published by the ECB.
• Safe haven: an asset investors buy when they feel uncertain, such as gold or the Swiss franc.
• Treasuries: US government bonds.