What Are Currency Crosses?

Currency crosses or cross rates may be terms you are unfamiliar with, but they simply refer to a transaction between two currencies, of which the US Dollar (USD) is not one. This means the USD is not used as an intermediary, and one currency is simply exchanged for the other. Naturally, the most commonly used currency crosses involve the world’s other most widely traded currencies, such as the Japanese Yen and the Euro.

Most Commonly Used Currency Crosses

Some of the most frequently traded currency crosses involve major currencies, with common examples including EUR/GBP, GBP/JPY, EUR/JPY, and EUR/CHF. Notably, the EUR/GBP and GBP/JPY are among the world’s ten most traded currency pairs, while the others typically involve the US dollar, highlighting its continued dominance in global financial markets.

Advantages of Currency Crosses

As we have seen, currency crosses have become more prevalent as the forex market and trade have expanded into the end of the 20th Century. These direct exchanges provide multiple advantages for individuals, companies, and traders, which we will now look into. Naturally, currency crosses make it easier to make international transactions as there are fewer steps to go through and fewer currencies to deal with, with this also making the transaction cheaper as it then involves only crossing one spread.

1. Diversification: Currency crosses allow traders to diversify their portfolios by accessing pairs that do not involve the US dollar, reducing overall risk.

2. Reduced USD Dependency: Trading currency crosses minimizes reliance on the US dollar, helping traders avoid potential volatility associated with it.

3. Unique Market Opportunities: These pairs can respond to specific economic and political events, providing distinct trading opportunities based on different regional factors.

4. Potential for Higher Volatility: Some currency crosses experience significant price movements, potentially offering traders chances for profit during periods of increased volatility.

5. Tighter Spreads: Many currency crosses can have tighter bid-ask spreads, resulting in lower transaction costs and potentially enhancing profitability.

How Traders Can Use Currency Crosses

In forex trading, investors can utilize currency crosses in various ways to gain an edge and enhance profitability. One common approach is to capitalize on global events, such as Brexit. For instance, a trader could take a position in EUR/GBP, which is less capital-intensive and simpler than trading both EUR/USD and GBP/USD.

Traders might choose currency crosses to focus on a specific currency while minimizing the influence of the USD, especially if they believe it could affect their position.

Using currency crosses also expands trading options. Many traders stick to major pairs and commodity currencies, all of which involve the USD. This limits their trading choices to just a handful of pairs and ties their strategies closely to the dollar's performance. By trading currency crosses, traders can bypass this USD dependency and explore a wider range of less common currencies, potentially providing more opportunities for speculation.

Conclusion

Currency crosses play a crucial role in the foreign exchange market, offering traders a diverse range of opportunities beyond the major pairs that include the US dollar. By allowing direct comparisons between other currencies, these pairs enable traders to capitalize on various economic and geopolitical factors, enhancing their trading strategies.

Understanding currency crosses not only diversifies a trader’s portfolio but also mitigates the risks associated with USD volatility. As the forex market continues to evolve, incorporating currency crosses can lead to more informed trading decisions and greater potential for profit. Whether for speculation or hedging, mastering these pairs is essential for anyone looking to navigate the complexities of global finance effectively.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.