Forex Glossary

Cross Rate

Have you ever heard of the term “Cross Rate” and wondered what it actually means? 

If you’re just starting to in Forex (foreign exchange trading), this might sound like a confusing term. 

Don’t worry many terms in Forex can make your head spin at first. 

However, understanding the Cross Rate can help you stay in the Forex market with more confidence. 

Keep reading to learn what this term is all about and how it affects the value of currencies around the world!

What Is a Cross Rate in Forex?

A Cross Rate is the exchange rate between two currencies that do not involve the US Dollar. 

Yes, in the Forex market, the US Dollar is often involved in most currency exchanges, but a Cross Rate happens when the two currencies are traded directly against each other without the US Dollar in the middle.

Let’s understand better with this example. 

Let’s take for instance, you want to exchange Japanese Yen (JPY) for British Pounds (GBP). Instead of converting your Yen into US Dollars first, and then converting those US Dollars into Pounds, a Cross Rate allows you to directly exchange JPY to GBP. 

This can save time and costs.

Why are Cross Rates Important?

Now, you might wonder, why Cross Rates matter in the world of Forex. Well, it’s all about convenience and efficiency. 

In the past, traders had to go through the US Dollar as a middle step, which could lead to extra costs and delays. 

But with Cross Rates, traders can exchange currencies more quickly and often at better rates.

For example, let’s say you’re in Europe and you want to exchange Euros for Japanese Yen. 

Without the Cross Rate, you would need to convert your Euros to US Dollars and then convert those US Dollars into Japanese Yen. 

This extra step adds complexity and sometimes additional costs. Cross Rates make this process smoother and more cost-effective for traders.

How Are Cross Rates Calculated?

You might be asking, “How do Forex traders know the value of a Cross Rate?” Great question. 

Cross Rates are usually calculated by looking at the value of each currency against a common base, such as the US Dollar. 

To calculate a Cross Rate, the value of each currency in the pair is determined by how much of one currency is needed to buy a unit of the other currency.

For example, if the Euro to US Dollar rate (EUR/USD) is 1.25 and the Japanese Yen to US Dollar rate (JPY/USD) is 0.009, the Cross Rate between the Euro and Japanese Yen (EUR/JPY) can be calculated by dividing 1.25 by 0.009. 

This gives the current exchange rate between the Euro and Japanese Yen.

How Do Cross Rates Affect Forex Trading?

Cross Rates have a big impact on Forex traders. When traders want to exchange currencies that don’t directly involve the US Dollar, they rely heavily on these rates. 

Cross Rates allow for faster and more efficient trading, making it possible for traders to react to changes in the market more quickly.

For instance, if the value of the Euro is rising against the US Dollar, but the value of the Japanese Yen is falling, a Forex trader might decide to exchange Euros for Japanese Yen to take advantage of this market movement. 

Without Cross Rates, this would be a much more complicated and expensive process.

The Role of Cross Rates in Currency Pairs

In Forex trading, currencies are always quoted in pairs. For example, the EUR/USD pair shows how many US Dollars you can get for one Euro. 

Similarly, a Cross Rate is a currency pair that does not involve the US Dollar. Common examples of Cross Rate pairs include EUR/GBP (Euro to British Pound), EUR/JPY (Euro to Japanese Yen), and GBP/JPY (British Pound to Japanese Yen).

These currency pairs are particularly useful for traders who specialize in markets outside of the US or those who want to make more efficient trades without the US Dollar as an intermediary.

Examples of Cross Rates in Forex

To understand Cross Rates better, let’s look at some common examples:

  • EUR/GBP (Euro to British Pound)
  • EUR/JPY (Euro to Japanese Yen)
  • AUD/JPY (Australian Dollar to Japanese Yen)
  • GBP/CHF (British Pound to Swiss Franc)

Let’s look at a simple example of how Cross Rates can be used in trading. 

Suppose you’re a Forex trader, and you’re interested in trading the British Pound (GBP) against the Japanese Yen (JPY). 

The current Cross Rate for GBP/JPY might be 150.00. This means that 1 British Pound is worth 150 Japanese Yen.

If you think the value of the British Pound is going to rise compared to the Japanese Yen, you might decide to buy the GBP/JPY pair. 

If your prediction is correct, and the value of the British Pound goes up, you can sell the GBP/JPY pair at a higher rate, making a profit.

Cross Rates and Major Currency Pairs

While Cross Rates can be very useful for trading, they are a bit different from what are called “major currency pairs.” 

Major currency pairs are pairs that always involve the US Dollar, such as EUR/USD, GBP/USD, or USD/JPY. 

These are the most traded pairs in the Forex market and are typically more liquid, meaning they are easier to buy or sell quickly.

On the other hand, Cross Rates are usually a bit less liquid, but they offer opportunities for traders to make profitable trades between currencies outside of the US Dollar.

How to Use Cross Rates in Your Trading Strategy

Now that you understand what Cross Rates are and how they work, you might be wondering how to use them in your trading strategy.

When trading with Cross Rates, it’s important to follow some basic steps:

1. Choose Your Currency Pair

First, decide which two currencies you want to trade directly. For example, EUR/GBP or GBP/JPY.

2. Check the Exchange Rate

Look up the exchange rate for your chosen currency pair. This rate tells you how much of one currency you’ll get for another.

3. Open Your Trade

Once you know the exchange rate, you can decide whether you want to buy or sell the currency pair. For example, if you think the Euro will rise against the British Pound, you would buy EUR/GBP.

4. Monitor the Market

Keep an eye on the exchange rate because it can change quickly, especially in volatile markets. This is crucial for making profits or cutting losses.

Conclusion

A Cross Rate is a Forex term that refers to the exchange rate between two currencies that don’t involve the US Dollar. 

By eliminating the US Dollar from the equation, Cross Rates allow traders to make more efficient and cost-effective exchanges between different currencies. 

Understanding how Cross Rates work is essential for anyone who wants to get into Forex trading, and it opens up a whole new world of trading possibilities. 

So, whether you’re just getting started or looking to refine your trading skills, paying attention to Cross Rates can be a powerful tool in your Forex journey.

Leave a Reply

Reach us on WhatsApp
1
This website uses cookies and asks your personal data to enhance your browsing experience. We are committed to protecting your privacy and ensuring your data is handled in compliance with the General Data Protection Regulation (GDPR).

Join waitlist

Stay equipped and build your knowledge around the financial market. Get notified when we have fully launched.

coming soon app