Cross-Rates Demystified: How Global Currency Markets Interact

Key Takeaways:

✅ Cross-rates are important in the global financial market as they determine the value of one currency against another
✅ Cross-rates are calculated based on the exchange rates of the two currencies involved, and are used in international trade and investment
✅ Factors affecting cross-rates include economic indicators, political events, and market sentiment
✅ Digital currencies are a new player in the global currency market and have the potential to disrupt cross-rates in the future

As the global economy continues to grow, the definition of cross-rates has undergone significant changes over the years. Cross-rates refer to any currency pair that does not include the US dollar, which accounts for about 70% of global government money reserves and world trade. In this article, we will dive deeper into the concept of cross-rates, how it has evolved, and its significance to traders and currency exchange customers.

Trader Perspective: Negotiating a Price

For traders, their job involves negotiating a price that works for both parties. This can involve game-playing, deceit, and other tricks to get the best possible outcome. The result is a contract for currency exchange where both parties agree to deliver their baskets of currency to each other at a specified place and time. In practice, the actual exchange is a wire transfer from one checking account to another in the two countries of issuance of each currency.

Currency Exchange Customer Perspective: Price-Taking

On the other hand, currency exchange customers are price-takers. When exchanging currency at an airport kiosk, they are not trading. The exchange rate applied is displayed on the kiosk sign, and they have to accept it or leave it.

Financial Analyst Perspective: The Evolution of Cross-Rates

The definition of cross-rates has evolved over the years. Decades ago, a cross-rate referred to any currency pair that did not include your home currency. However, today, the common definition of a cross-rate is any currency pair that does not include the US dollar. This is because the dollar is used as a component in all major exchange rates, considering its global dominance.

News and Data Provider Perspective: Defining “Major World Currencies”

Yahoo! chooses to include non-dollar crosses as “major world currencies.” This is because if traders are trading euro/dollar, they can simply say “euro” without mentioning the word “dollar,” and they will still be understood. However, if what they mean is “euro/yen,” they have to specify the name of the second currency. Regardless of how people define cross-rates, it is crucial to specify which currency pair they are referring to when discussing it.

The Importance of Cross-Rates to Traders and Customers

For traders, cross-rates provide a way to diversify their portfolio and take advantage of opportunities in different markets. It also allows them to hedge against potential losses by betting on a different currency.

For currency exchange customers, cross-rates are essential when traveling to countries that do not accept their home currency. It enables them to exchange their currency for the local currency and purchase goods and services with ease.

Conclusion

In conclusion, cross-rates have evolved over the years, and the definition has changed to exclude the US dollar. The principles of trading and currency exchange remain the same, finding a price that works for both parties and creating a contract for currency exchange. Traders and customers alike must specify the currency pair they are referring to when discussing cross-rates. For traders, cross-rates provide opportunities to diversify their portfolio and hedge against potential losses. For currency exchange customers, it enables them to exchange their currency for local currency and purchase goods and services with ease.