A cross currency refers to a currency pair or transaction that does not involve the U.S. dollar. A cross currency transaction, for instance, does not use the U.S. dollar as a contract settlement currency. A cross currency pair is one that consists of a pair of currencies traded in forex that does not include the U.S. dollar. Common cross currency pairs involve the euro and therefore the Japanese yen.
Since the end of the gold standard and the increase of global trading at a wholesale level, cross currency transactions are part of every day financial life. Not only do cross currency transactions make it easier for international payments, but they have also made them markedly cheaper. Because a private doesn’t need to swap the currency into U.S. dollars first, there is only one transaction, meaning only one spread is crossed. Furthermore, because non-USD pairs are now more commonly traded, the spreads have tightened making it even cheaper to maneuver from one currency to a different .
Cross currency pairs are often excellent tools for forex traders. Some cross currency trades are often found out to position traders on particular world events, like using the EUR/GBP to back the continued Brexit saga. The same trade would be more complex and capital intensive fixing separate positions with the USD/GBP and USD/EUR, but this method remains wont to create exotic cross currency pairs that are not widely traded. Common cross currency rates involve the Japanese yen. Many traders cash in of the carry trade where they own a high yielding currency just like the Australian dollar or the New Zealand dollar and short the japanese yen – the low yielding currency.