Understanding Cross Rates: Definitions and Major Currency Pair Examples

What Is a Cross Rate?

A cross rate is an exchange of any two currencies that aren't the official currency of the country in which the quote is published. Any currency exchange in which neither of the currencies is the U.S. dollar is considered a cross rate in practice. One of the most common cross-currency pairs is the euro and the Japanese yen. Foreign exchange traders use the term cross rate to refer to price quotes between any pair of currencies that doesn't include the U.S. dollar.

How Cross Rates Work in Currency Exchange

The U.S. dollar is usually used to establish the value of each of the two currencies being traded. You would first determine that the British pound was valued at maybe 1.25 to one U.S. dollar and that the euro was valued at 1.07 to one U.S. dollar if you were calculating the cross rate of the British pound versus the euro,

Exploring Major Currency Pairs

Foreign exchange (forex) traders use the term cross rate to refer to price quotes between currencies in which neither is the U.S. dollar.

Most transactions on the forex are in major currency pairs. When a financial news site quotes USD/CAD at 1.28, it means one U.S. dollar equals 1.28 Canadian dollars.

The exchange rate between the euro and Japanese yen is a common cross rate since it excludes the U.S. dollar. But in the pure sense of the definition, it's considered a cross rate if it's referenced by a speaker or writer who isn't in Japan or one of the countries that use the euro as its official currency.

The true definition of a cross rate involves quoting a rate in a region where neither currency is used, but it's mostly applied to trades that don't involve the U.S. dollar.

Key Examples of Major Cross Rates

While any two currencies can be paired, the euro versus the British pound (EUR/GBP) and the euro versus the Japanese yen (EUR/JPY) are among the most traded. These two pairs are the only cross-rate currency pairs that appear in the top 10 most traded currency pairs.

The euro is the base currency for the quote if it's included in the pair. The British pound is the base if the pound is included but the euro is not.

Notable Examples of Minor Cross Rates

Less active interbank cross rates include the Swiss franc against the Japanese yen (CHF/JPY) and the British pound against the Swiss franc (GBP/CHF). Cross rates involving the Japanese yen are usually quoted as the number of yen versus the other currency regardless of the other currency.

Currencies similar in value and conventions need careful quoting to avoid trading mistakes. The New Zealand dollar (NZD) was quoted at 1.08 per Australian dollar (AUD) in late December of 2023. Both of these currencies are quoted against the U.S. dollar. The value reflects the number of U.S. dollars it would take to buy the foreign currency.

But the quote provides no guidance as to which is the base currency. The market convention is to use the stronger AUD, which is also the larger economy, as the base. The two currencies trade near parity to each other, however, creating the potential for a misquote.

The Bottom Line

Cross rates involve exchanging two currencies, neither of which is the U.S. dollar. Nonetheless, the USD is frequently used as a reference currency for cross rates. The most commonly traded cross-currency pairs include EUR/GBP and EUR/JPY.

The major crosses have bid-offer spreads that are slightly wider than the major dollar-based pairs but they're 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.