An overview of currency crosses
Exchanging currencies today is not the same as the way we exchange currencies before. Before, a person would need to exchange their local currency to US Dollar before exchanging it with another currency. Why? The US dollar is considered the vehicle currency, which is a medium for international deals. For instance, if I have a Euro that I would like to exchange for Swiss Francs, I would have to exchange my Euro first for US Dollars. From there, I can exchange those US Dollars for Swiss Francs.
The rise of currency crosses
Later on, people made a way to bypass this lengthy process which they called the currency cross. Currency cross is like a shortcut that directly converts one specific currency to another without using the US Dollar conversion in between. Some of the most popular currency crosses include EUR/JPY, EUR/GBP, EUR/CHF, and GBP/JPY.
Where do the currency cross rates come from?
There is a calculation when getting currency cross rates, but you do not need to do all that because your broker's platform will do everything for you. However, if you are naturally curious, we will tell you how to get those rates. For instance, you want to know how EUR/JPY gets calculated. To know the bid/ ask price of the currency cross EUR/JPY, you will need to know first the bid/ ask price of EUR/ USD and USD/ JPY. Both of them have the USD as their same denominator, and these two pairs are also known as the "legs" associated with the USD.
- Getting the bid price of EUR/JPY = EUR/ USD bid price * EUR/JPY bid price
- Getting the ask price of EUR/JPY = EUR/USD ask price * USD/ JPY ask price
The US Dollar
The world's reserve currency is the USD, and a big chunk of agricultural and commodities are priced in the USD. A country that wants to purchase agricultural goods or other commodities from another country still needs to exchange its local currency to USD before buying those goods. It is the reason why some countries keep a large amount of US reserves in their central banks.
So, how is this connected with trading? The USD is involved in almost 80% of forex market transactions. Any trader would always be interested in how the USD is doing today. The USD's liquidity massively impacts major currency pairs like GBP/USD, EUR/USD, USD/ CHY, and USD/ JPY. It also affects commodity currencies such as AUD/USD, USD/ CAD, and NZD/ USD. These are some of the most famous currency pairs, and as you can see, they all have USD in them. Also, you may have noticed that the significant seven currencies are all involved with the USD.
So, why trade currency crosses?
Currency crosses have more
currency selection that can lead you to great trading opportunities and options because they
are not dependent on the US Dollar. They tend to have various price movements
and behavior. It is no secret that many people trade with or against the USD,
but you can always trade differently with currency crosses.
