Judging from the name ‘reciprocal currency’ we can think of the opposite currencies. But what is the real meaning of it? Therefore, we call a forex pair a reciprocal currency when the US dollar isn’t the base currency. Rather than this, the US dollar will help in finding the value of the base currency as per the forex pair.
For example, in the currency pair of EUR/USD, EUR is the base currency while USD is the quote one. So 1.20 is equivalent to exchanging 1 euro with 1.20 US dollars. This is contrary to the standard currency pair like USD/JPY, which has the dollar as its base currency.
Understanding Reciprocal Currencies
The U.S. dollar rates as a base currency denomination in almost all USD currency pairs appear first in an FX quote as follows: USD/JPY (US dollar vs. Japanese yen) and USD/CAD (US dollar vs. Canadian dollar).
Let’s say you are traveling to Israel and want to convert your US dollars to Israeli Shekels. Finally, you get a rate of 3.25 with the USD and ILS currencies. This simply implies that for every 1 US dollar, you can receive 3.25 Israeli Shekels. In other words, in this case, the US dollar is stronger than the Israeli Shekel.
These quotes will let you know the relative value of each currency and how much you will get in return.
But they are quoted in what’s called “European” terms in that they treat the currency other than the U.S. dollar as the base currency.
Hence, “Reciprocal currency” refers to all currency pairs quoted in foreign currencies (except the US dollar and another currency) in the foreign exchange market.
Major currency pairs involving the USD but where the USD is not the base currency include EUR/USD (currency pairs for euro to US dollar), GBP/USD (British pound to US dollar), and other pairs like Australian Dollar to US Dollar.
Example of Reciprocal Currency
Let’s take an instance of a reciprocal currency pair such as NZD/USD. In this case, the New Zealand Dollar is the main currency, and the US Dollar is used to measure its value.
To put it simply, the exchange rate for NZD/USD indicates how much one New Zealand Dollar is worth in U.S. dollars. For instance, if the NZD/USD rate is 0.70, it means you can exchange one NZD for 70 U.S. cents.
Similarly, the EUR/USD exchange rate is also presented in dollar terms, despite the Euro being the base currency. For example, if the EUR/USD rate is $1.15 for 1 Euro, a trader would refer to it as the Euro/U.S. rate is $1.15.
How Reciprocal Currency Works?
The reciprocal currency works in the following manner:
Issuance:
- A reciprocal currency is best issued by a central authority such as a community organization or local government.
- The issuance of such currency may be physical or digital.
Earning the Currency:
The different ways by which an individual can earn such currency are:
- Providing some goods or services to other community members
- Taking time to volunteer for community projects Educational or skills trading programs.
Spending the Currency:
- The currency is to buy products or services from other members of the community.
- Even pay local taxes or fees.
Tracking and Balancing:
There is a system, often digital, which shows depending on this the currency flows into issuing, into spending, into redemption, thus ensuring currency stability and the weight of the currency.
What Does “Reciprocal Currency Arrangement” Mean?
A reciprocal currency arrangement is a partnership between two countries in which they commit to holding a certain amount of each other’s currencies in their foreign exchange reserves. This setup improves the liquidity of both currencies in the global financial markets, facilitating trade and investment for businesses and individuals across borders. By guaranteeing a consistent supply of each other’s currencies, these arrangements help to streamline international financial transactions and promote economic stability.
Conclusion
Reciprocal currency systems provide significant options for communities and individuals instead of conventional economic systems. These systems will build communities, equality, and sustainability, which are essential factors to change in the current ideas of contact and exchange.