What is a cross currency pair?

A cross currency pair refers to a currency pair that does not involve the US Dollar as one of the currencies in the pair. This is significant in the foreign exchange market because most currency pairs are quoted relative to the US Dollar, making pairs that exclude it quite distinct.

For instance, currencies like the Euro, British Pound, or Japanese Yen can be traded against each other without involving the US Dollar, constituting cross currency pairs. These pairs often provide traders with opportunities for a more diverse trading strategy, especially when the US Dollar is experiencing volatility or when traders want to speculate on the relative strength of two other currencies.

Understanding cross currency pairs is essential for forex trading, as it allows for a broader view of international currency movements and facilitates trading in markets that may be more stable or favorable based on specific economic conditions between the two currencies involved.