Cross Currency Pair

A cross currency pair (or simply "cross") is any forex pair that does not include the U.S. dollar on either side. Common examples include EUR/GBP, EUR/JPY, GBP/JPY, AUD/NZD, and CHF/JPY. While these pairs are traded directly in modern markets, historically they were calculated by converting each currency through the U.S. dollar, which is why they are sometimes called "crosses."

Cross pairs are subdivided into categories based on the currencies involved:

• Euro crosses: EUR/GBP, EUR/JPY, EUR/CHF, EUR/AUD — popular due to the euro's importance in global trade
• Yen crosses: GBP/JPY, AUD/JPY, NZD/JPY, CAD/JPY — favored for carry trades due to Japan's historically low interest rates
• Pound crosses: GBP/CHF, GBP/AUD, GBP/NZD — known for higher volatility and wider pip ranges
• Commodity crosses: AUD/NZD, AUD/CAD, NZD/CAD — influenced by commodity price movements and regional trade relationships

Cross pairs offer several unique trading opportunities. They allow traders to express a view on the relative strength of two non-USD currencies without exposure to dollar fluctuations. For instance, if a trader believes the European economy will outperform the UK economy, they can buy EUR/GBP without needing to form a view on the U.S. dollar.

However, cross pairs generally have wider spreads and lower liquidity than their corresponding major pairs. They can also exhibit higher volatility, particularly yen crosses like GBP/JPY, which is nicknamed "the dragon" or "the beast" among traders for its tendency to produce large, fast price swings. The volatility in crosses occurs because their prices are effectively influenced by the movements of two underlying USD pairs simultaneously.

Cross pairs are valuable for portfolio diversification in forex trading, as they can behave quite differently from major pairs and may offer trading opportunities when the dollar is range-bound and offering few directional signals.