Why do currencies trade in pairs?

Currencies trade in pairs to effectively show the relative value of one currency against another. This means that when a trader is buying one currency, they are simultaneously selling another. The first currency in a pair is known as the base currency, and the second is the quote currency. The exchange rate tells you how much of the quote currency is needed to purchase one unit of the base currency.

For example, in a currency pair such as EUR/USD, the value indicates how many U.S. dollars are required to buy one euro. This method of trading allows for the measurement of value between currencies and facilitates comparisons, which is essential for traders to make informed decisions. Recognizing the relative value helps participants in the foreign exchange market determine where they perceive opportunity or undervaluation.

The other options do not accurately capture the primary rationale for currency pairs. While simplifying transaction processes and addressing risk are relevant in trading, the core reason for currencies being traded in pairs lies in understanding their relative value to one another. Additionally, currencies are not always interchangeable in the context of trading; they trade based on market dynamics, which is inherently linked to their relative strength within a pair.