What is a Cross Rate?
A cross rate is the currency exchange rate between two currencies when neither are the official currencies of the country in which the exchange rate quote is given. Foreign exchange traders often use the term to refer to currency quotes that do not involve the U.S. dollar, regardless of what country the quote is provided in.
Understanding Cross Rate
An exchange rate between the euro and the Japanese yen is considered to be a cross rate in the market sense because it does not include the U.S. dollar. In the pure sense of the definition, it is considered a cross rate if it is referenced by a speaker or writer who is not in Japan or one of the countries that uses the euro. While the pure definition of a cross rate requires it be referenced in a place where neither currency is used, the term is primarily used to reference a trade or quote that does not include the U.S. dollar.
- A cross rate is technically any rate between two currencies that are not the domestic currency in the country where the quote is published.
- In practice, a cross rate is usually a currency pair that doesn't involve the U.S. dollar.
Examples of Major Cross Rates
Any two currencies can be quoted against each other, but the most actively traded pairs are EUR/CHF, which is the euro versus the Swiss franc; EUR/GBP, the euro versus the British pound; EUR/JPY, the euro versus the Japanese yen; and GBP/JPY, the British pound versus the Japanese yen. The euro is the base currency for the quote if it is included in the pair. If the British pound is included but the euro is not, the pound is the base. These currencies are actively traded in the interbank spot foreign exchange market, and to some extent in the forward and options markets.
Examples of Minor Cross Rates
Crosses traded in the interbank market but are far less active include CHF/JPY, the Swiss franc versus the Japanese yen; and GBP/CHF, the British pound versus the Swiss franc. Crosses involving the Japanese yen are usually quoted as the number of yen versus the other currency, regardless of the other currency.
Any two currencies can be quoted against each other, regardless of whether the pair is traded. Cross quotes in currencies that are similar in value and quoting convention must be defined carefully to prevent mistakes. For example, the New Zealand dollar was quoted at 1.0500 per Australian dollar in late June 2016. Both are quoted against the U.S. dollar as the number of U.S. dollars to buy the foreign currency, which provides no guidance as to which is the base currency. It is market convention that uses the stronger AUD, which is also the larger economy, as the base. The two currencies trade near parity to each other, creating the potential for a misquote.
Bid-Offer Spread and Cross Rates
The major crosses have bid-offer spreads slightly wider than the major dollar-based pairs, but they are quoted actively in the interbank market. Spreads in the minor crosses are generally much wider; some are not quoted directly at all, so a quote must be constructed from the bids and offers in the component currencies versus the U.S. dollar.