What is a Cross Rate in Forex Trading?
Quick Answer: A cross rate is an exchange rate between two currencies where neither is the US Dollar. Examples include EUR/GBP, AUD/JPY, and EUR/CHF. Cross rates are calculated from the respective USD exchange rates of both currencies.
Understanding Cross Rates in Forex
A Cross Rate (or currency cross) is an exchange rate between two currencies where neither currency is the US Dollar. For example, EUR/GBP, AUD/JPY, or GBP/CHF are all cross rates because they don't involve USD.
Why Cross Rates Exist
Historically, most currency trading went through the USD as an intermediary. To trade EUR for GBP, you'd actually execute two trades:
- Sell EUR for USD (EUR/USD)
- Buy GBP with USD (GBP/USD)
Modern forex platforms calculate cross rates automatically, but they're still derived from the major USD pairs.
How Cross Rates Are Calculated
Cross rates are calculated using the respective USD exchange rates:
Example Calculation:
- EUR/USD = 1.1000
- GBP/USD = 1.2500
- EUR/GBP = 1.1000 / 1.2500 = 0.8800
Common Cross Rate Categories
Euro Crosses
EUR/GBP, EUR/JPY, EUR/CHF, EUR/CAD, EUR/AUD
Yen Crosses
EUR/JPY, GBP/JPY, AUD/JPY, NZD/JPY (popular for carry trades)
Pound Crosses
GBP/JPY, EUR/GBP, GBP/AUD, GBP/CHF
Commodity Currency Crosses
AUD/NZD, AUD/CAD, NZD/CAD (high correlation to commodities)
Trading Cross Rates
Cross rates offer unique opportunities:
- Pure currency plays - Trade one economy vs another without USD influence
- Wider spreads - Generally have larger spreads than major pairs
- Lower liquidity - Less trading volume than USD pairs
- Unique patterns - Can trend differently from USD pairs
Cross Rates vs Major Pairs
| Feature | Major Pairs | Cross Rates |
|---|---|---|
| Includes USD? | Yes | No |
| Typical Spread | 0.5-2 pips | 2-5 pips |
| Liquidity | Very High | Moderate |
| Volatility | Moderate | Can be higher |
Practical Example
The European Central Bank raises interest rates while the Bank of England holds steady. This makes the Euro more attractive than the Pound. Instead of trading EUR/USD and GBP/USD separately, you could trade EUR/GBP directly to capture the relative strength between these two currencies without USD exposure.
Related Terms
Learn More About Forex Trading
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