Currency trades

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Last Updated: Thursday, 30 April 2026 18:29

Published: Saturday, 18 January 2025 15:02

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Currency Trades:

You'll hear a lot about Currency trades too, where people bet on a pair of currencies and depending on what direction the currencies move, you make/lose money.

Currency Basics:

Currency Pair: A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. It indicates how much of the quote currency is needed to purchase one unit of the base currency.

Ex: 80 USD/INR = 80 => This implies that 80 INR (quote currency) is needed to buy 1 USD (base currency).

The US dollar (USD) is often used as the base currency because it is considered the world's primary reserve currency. So, most FX quotes are written as USD/<Quote_currency>. The value quoted is > 1 for most currencies as you need more of the other country's currency to buy 1 USD. That makes it easy to quote, as 0.012 doesn't sound good in quoting (if quoting was done in INR/USD). Notable exceptions are USD/GBP,  USD/EURO which are slightly < 1 as of 2024.

The EUR/USD currency pair is considered the most liquid currency pair in the world. NOTE: it's not in the conventional USD/EUR form, with USD being the base currency. This is how it was done historically. The USD/JPY is the second most popular currency pair in the world.

Forex Market:

Forex market is where these currency pairs are traded.

Historical Currency exchange rates:

Each country prints their currency, and the exchange rates are decided by the people who exchange one currency for the other. Usually, the cost of same consumable as rice, etc determines how much is one currency valued against the other.  Exchange rate is also dependent on how much printing takes place for one currency vs the other.

Money supply is one of the key metrics that measures the amount of money in the system. M1 money supply measures highly liquid money in circulation - i.e currency, checking a/c and other liquid assets. M2 money supply is the most widely used metric for tracking money supply in any economy. It includes less liquid assets too - i.e M1 + savings deposits (including money market deposit accounts) + small-denomination time deposits (<$100,000) + balances in retail money market funds (less IRA/Keogh balances)

USA had M2 money supply inc from $300B in 1960 to $1T in 1975 and then to $22T in 2025 (M1 money supply was slightly lower at $19T in 2025). So, in 50 years from 1975-2025, M2 supply increased 22X, implying 6%-7% growth in M2 money supply. GDP is another measure of money supply, as inc in nominal GDP usually tracks the money supply closely. Nominal GDP has gone from $0.3T in 1950 to $3T in 1980, and then to $30T in 2025. So, nominal GDP has averaged around 5%-6% in the last 50 years.

So, gold or other fixed assets which can't grow in supply are expected to have their prices go up by the same amount (5%-7%) every year when measured in USD, i.eUSD is depreciating by that amount every year compared to hard currency as gold, silver, etc.

Usually countries where there's lot of money printing happening (i.e higher money supply) are the ones which depreciate against the USD, as USD M2 growth lags those of other currencies causing prices of commodities in other currencies to go up (i.e results in inflation).

USD/INR: INR is Indian rupee (Indian currency). This has historically depreciated by about 5%/yr, even though M2 money supply has avg 15% in India compared to 7% in USA (causing a 8% differential). 

USD/YEN: Yen is Japanese currency. This is about 150 as of 2025, i.e 1 USD buys 150 Japanese yen.

USD/CNY: CNY is chinese Yuan (currency of China). It has historically been around 6, as Chinese govt intervenes to support it around 6-6.5. However, as of 2025, it 's around 7.