What are cross rates?

Cross rates refer to currency pairs that do not involve the U.S. dollar as one of the currencies in the trading pair. Instead, they compare the value of one currency against another directly, allowing traders to derive exchange rates between currencies that might not be directly quoted in the market. For instance, if a trader is looking to exchange euros for Japanese yen but does not want to first convert euros to U.S. dollars, they would use the cross rate between the euro and yen to make the exchange efficiently.

Understanding cross rates is essential for currency traders and financial professionals because it enables them to partake in foreign exchange transactions and strategies when trading or investing in currencies that are not paired with the U.S. dollar. This offers more opportunities for arbitrage and provides a clearer picture of the relative value of currencies in global markets.