A currency cross pair (also known as a cross-currency pair, or simply a ‘cross’) is a currency pair that does not include the US dollar.
There was a time when you cannot change currencies without having to convert it first to dollars. For example, if you have GBP and you want to convert it to the Japanese Yen, you couldn’t make an outright conversion between the two currencies. You needed to convert your GBP to the US dollar first, which is then converted into the yen.
But because of the implementation of cross-currencies, that extra step of converting a currency to the US dollar first has been eliminated. You can now convert GBP to the yen directly.
Cross currency calculations
Converting cross currencies is now an easy process since the cross rates are already automatically calculated by forex trading platforms. But in the interest of education, let’s talk about how to manually calculate cross currencies.
To calculate cross currencies you will need to look at the bid price and ask price for two currency pairs. For example, you want to convert the GBP to yen. Then you need to look at the GBP/USD and USD/JPY currency pairs. You need to find pairs with the US dollar as the common denominator because it will save as the ‘legs’ of the GBP/JPY pair.
Here’s an example of the bid and ask price of the two currency pairs (the figure on the left is the bid price while the figure on the right is the ask price):
GBP/USD: 1.56640 / 1.56645
USD/JPY: 95.025 / 95.026
To find out the bid price for the GBP/JPY, all you need to do is to multiply the bid prices for the GBP/USD and USD/JPY pairs. This would result in 148.85
Getting the ask price is also as simple, just multiply the ask price of the two currency pairs, which will result in 148.85.
Cross Currency Pairs and Trading
About 90 percent of forex transactions involve the US dollar because it is the world’s reserve currency. Countries need dollars to buy various agricultural and industrial products and commodities. A country needs to convert its local currency to the dollar first before it can purchase anything. This is the reason why countries need a reserve of US dollars in its treasury.
If you trade the usual currency pairs, what you’re essentially doing is just taking a pro-dollar or anti-dollar stance. This doesn’t give a trader a lot of leeway and options in terms of strategies because all of his analysis will basically also hinge on the value of the dollar.
Trading cross currencies gives you more options for various trading opportunities because you remove the US dollar from the equation, so to speak. You’ll see different price movements and the behavior of the market will be different.
About The Author
Mario Singh owns Askmariosingh.com, the forex trading-oriented site is popular among aspiring traders because it gives valuable information about forex trading for beginners.
