What cross rate means
A cross rate is an exchange rate between two currencies where neither is the US dollar. EUR/GBP, EUR/JPY, GBP/CHF and AUD/NZD are common examples. The word cross refers to the way the rate is derived or crossed through a third currency, historically the dollar, which has long been the main vehicle currency in global foreign exchange.
In practice, the term has two related uses. In the narrow sense it is the calculation: working out a rate for a pair from two quotes against a common currency. In the broader sense it labels a whole group of currency pairs, as opposed to the majors, which all include the dollar, and the exotics, which pair a major with a currency from a smaller economy.
Cross rates are widely traded in their own right. Importers, exporters, travellers and investors with exposure to two non-dollar currencies use them. Retail brokers list dozens of crosses alongside the majors.
How it works
If you know how each currency trades against the dollar, you can compute the rate between them. The method depends on how the two quotes are written.
- Write both rates against the common currency, here USD.
- If the currency you want in the numerator and the one in the denominator are both quoted as units of the other per dollar, divide one by the other.
- If one is quoted as dollars per unit and the other as units per dollar, multiply.
- For a two-way price, pair the bid with the ask in the correct direction, because the cross inherits spreads from both legs.
In words: EUR/GBP = EUR/USD divided by GBP/USD. And AUD/JPY = AUD/USD multiplied by USD/JPY.
Dealers typically quote crosses directly from their own liquidity, not by calculating them live, but arbitrage keeps the direct price close to the implied one. If a gap opened, traders could profit by trading the three pairs, which pushes prices back into line. This three-way link is called triangular arbitrage.
A worked example
The numbers below are illustrative. Suppose EUR/USD is 1.0800 and GBP/USD is 1.2700.
- EUR/GBP = 1.0800 / 1.2700 = 0.8504 (rounded).
- Meaning 1 euro buys about 0.8504 pounds.
For a pair involving the yen, suppose AUD/USD is 0.6600 and USD/JPY is 150.00.
- AUD/JPY = 0.6600 x 150.00 = 99.00.
- Meaning 1 Australian dollar buys 99 yen.
Now the cost. Say EUR/USD has a spread of 0.8 pips and GBP/USD a spread of 1.0 pip. A synthetic EUR/GBP built from both legs carries spread from two trades, so a direct EUR/GBP at 1.2 pips may be cheaper than creating the position yourself, though the exact figures depend on the broker.
Why it matters
Crosses show the relative strength of two currencies, with the dollar removed from the picture. A move in EUR/GBP, for example, reflects changes in the euro versus the pound, even if both are moving against the dollar at the same time. That is useful for people whose business or portfolio is tied to those two currencies.
Cross pairs often have wider spreads than the major pairs because they trade in smaller volumes. They can also have different volatility profiles and trading hours. For retail traders on a platform, cost is one of the main differences from the majors.
Crosses also matter for conversion. When a broker converts a profit made on a non-dollar pair into your account currency, it may apply a rate that itself relies on a cross calculation, with a markup at each step.
How to use it in practice
- Compare the spread on the cross with the spreads on its two legs against the dollar.
- Check how pips are valued on the pair. The pip value is in the quote currency and may be converted into your account currency.
- Look at the trading session when both currencies are most active, since liquidity differs.
- Check overnight financing for both currencies, because swap depends on each leg's interest rate.
- Watch correlations. A position in two crosses sharing a currency can double up the same exposure.
- Use a demo account to see how quotes behave around news.
Common mistakes and misconceptions
- Thinking a cross rate is only a calculation. It is also a tradable market with its own quotes.
- Multiplying when you should divide. Always check the quoting direction.
- Ignoring the double spread when building a synthetic position from two pairs.
- Assuming a cross moves like the dollar pairs. Its behaviour is driven by the relative economies, not the dollar.
- Forgetting that crosses sharing a currency can duplicate risk, such as long EUR/GBP and long EUR/JPY.
Risks and limitations
Crosses can be less liquid at some hours, with wider spreads and larger slippage. Leveraged positions in them can lose money quickly. Central bank decisions in either currency can move the pair sharply, and some crosses gap at the weekend open.
Calculated rates are theoretical and may differ from what your broker quotes because of spreads and markups. Examples here are not forecasts.
How Brokeli looks at it
Crosses are a good test of a broker's pricing, since the spread on a less liquid pair shows where costs rise. In our research we record typical and average spreads for a range of pairs, including crosses, from published data, along with how conversion into the account currency is handled. We do not predict rates and the examples above are for learning only.
Frequently asked questions
What is a cross rate in forex?
It is the exchange rate between two currencies that does not involve the US dollar, such as EUR/GBP or AUD/JPY. It can be calculated from each currency's rate against the dollar, and it can also be traded directly as a pair.
How do you calculate a cross rate?
Take each currency's rate against a common currency, usually USD. Divide or multiply depending on how the rates are quoted. For example, EUR/GBP equals EUR/USD divided by GBP/USD. For a two-way price, pair the bid and ask carefully because spreads from both legs combine.
Are cross pairs more expensive to trade than major pairs?
Often yes. They usually trade in lower volume, so spreads tend to be wider. The difference varies by broker and time of day, so compare the quoted spread on a cross with the spreads of its two dollar legs.
What is triangular arbitrage?
It is trading three linked currency pairs to exploit small pricing gaps between a direct cross rate and the one implied by two dollar pairs. Fast traders and algorithms close such gaps quickly, so the direct and implied prices stay very close.
Does a cross rate always move independently of the dollar?
Not entirely. A cross reflects relative strength between two currencies, but both may react to US data or dollar moves. The effect can partly cancel in the pair, which is why a cross sometimes moves less than either leg against the dollar.