Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

What Is Cross Currency?

 The United States of America is the world’s largest economy. It is a $23-trillion economy (2021). The strength of the US economy supports the value of the dollar and that’s why the greenback is the most powerful currency in the world.

In the foreign exchange market, the dollar dominates. Around 90% of forex trading involves the US dollar, though it is only one of the world's 185 currencies.

Cross currency refers to a pair of currencies which does not involve the US dollar.

Dollar dominance

To understand what cross currency is, we need to turn back the clock to the end of World War II. The war had drained a lot of countries monetarily and physically, but a few nations prospered more than ever.

The strongest economy to emerge, in the post-world war era, was the United States. The end of world war also gave way to international trading between world economies. A need was felt to have a common yardstick currency against which all currencies could be pegged to ensure price parity.

The most stable currency at that point was the US dollar. It was decided that to convert any currency against another, it had to be mandatorily converted to the dollar.

Emergence of Cross Currency

With globalisation and rising trading volumes between different nations, a rise in the demand for foreign currencies was seen. Before the functionality of cross-currency trading emerged, the buying and selling of foreign commodities required two transactions:

  • First, converting the buying nation’s own currency into US dollars
  • And second, converting those US dollars into the selling nation’s currency

To facilitate effective trading and give a boost to investors involved in cross-currency trading, the need to convert to US dollars was done away with. Now, if you are an investor, you can directly invest in a cross-currency pair which doesn’t involve the US dollar at all.

Foreign Exchange Market

The best place to see the prominence of cross currency or cross-currency trading is in the foreign exchange market. The foreign exchange market is a culmination of investors, banks, investment management companies and brokers who enable the selling and buying of different currencies.

  • Demand of Cross Currency: No nation, in today’s times, can operate in exclusivity without having any trade ties with the different nations of the world. It’s the era of globalisation and the entire world has become one global village. The prime demand for cross-currency transactions exists because different countries want to make use of the goods and services offered by the other.
  • Supply of Cross Currency: For a country like India, cross currency transactions are not a new development. As per a survey, in 2020, India’s top exports have been diamonds and refined petroleum. Foreign currency flows in from different economies of the world, leading to a significant supply of cross-currency transactions

Cross-currency Pairs

There are several instances wherein cross- currency pairs can prove beneficial:

  • Diversification: Legendary investor Warren Buffet lives by the rule of diversification. To make most profits off from your portfolio, it is crucial to invest in different financial instruments. Currencies, make an exchange investment choice, which can enable increasing your profit margin with cross currency trading. However, it would require close monitoring of the currency price trends and the political, socio economic reasons dictating these movements.
  • Hedging: Hedging, in the context of investments, is basically a position whereby you would like to offset potential losses by one investment through the potential profits from the other. Investing in different cross-currency pairs makes for a good choice to hedge against the volatility of the cross-currency rates and optimises the return on investment.
  • Forex Trade and Speculation: In forex trade, cross currency pairs are excellent facilitators of increasing the trade volumes. For example, with Brexit, there were options to position trades from across the world on the currency pair of EUR/GBP directly. However, if we were to exclude cross-currency pairs, the trade had to be set up separately on USD/GBP and then USD/EUR



Cross-currency pairs are an excellent avenue to explore for those involved in forex trades. It enables setting trade positions in exotic, unlikely pairs which have not been very extensively traded in the past and make profits.

URLs Used for Research

Cross Currency Transaction - Overview, Uses, Role in Arbitrage (corporatefinanceinstitute.com)
Cross Currency - What are Cross Currency Pairs | Angel Broking

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

Most Popular

  • 13 May 2022
  • ICICI Securities

The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.   

  • 12 May 2022
  • ICICI Securities

What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them. 

  • 12 May 2022
  • ICICI Securities

What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it. 

  • 12 May 2022
  • ICICI Securities

Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". 

  • 12 May 2022
  • ICICI Securities

How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index. 

  • 12 May 2022
  • ICICI Securities

Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

  • 11 May 2022
  • ICICI Securities

How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances. 

  • 11 May 2022
  • ICICI Securities

How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool. 

  • 11 May 2022
  • ICICI Securities

Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.