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Forex Currency Pairs

The Currency Crosses

Currency crosses is the name given to any pair of currencies which are traded in the Forex Market but does not include U.S. Dollars in the pair. In the trade of currency crosses, one currency of any foreign country is trade with the currency of another foreign country without converting their currencies into U.S. Dollars at any stage. In the past, any trader who wanted to exchange a particular amount of money into any other currencies, it was essential to first convert that amount of money in U.S. Dollars and then further convert it into target currency. The advantage of currency cross is that traders can eliminate the stage of converting money in American dollars completely.

For example, in the GBP / JPY cross, a trader can directly convert their money which is originally in Japanese Yen to British Pound, without the need to first convert it into U.S. Dollars.

How to trade in currency cross if a forex account is represented in U.S. dollars?

Though in the forex market, traders are free to trade almost all the currencies existing in the world, but the majority of trading is carried out in the group of currencies known as the major currencies. These include U.S. Dollars, British Pound, Euro, Canadian Dollar and Japanese Yen.

The currencies which are traded and exchanged with each other are quoted together in the form of pairs and are referred to as Currency Pairs. An example of the major currency pair is EUR / USD in which Euro (the currency of European Union) is traded against U.S. Dollars (the currency of United State of America). Since U.S. Dollars is the most traded currency in the world, it comes under the category of major currencies. However, the other traded currency pairs which do not include U.S. Dollars in it are known as cross currencies.

Most of the forex traders and investors in the United States deposit money is U.S. Dollars in their respective margin accounts. But this does not mean that they will be restricted to trade only in the currency pairs which include U.S. Dollars in them. The traders in the United States are free to trade on all cross currencies. The only difference is that they will require undergoing two trades instead of just one.

Let us understand this point better with the help of an example. Suppose a forex trade has an account that is denominated in the currency of United States, which is U.S. Dollar. He or she wishes to trade Japanese Yen against British Pound. In order to carry out this trade, he or she will require to first purchase the British pound in exchange of U.S. Dollars. Once this is done, the traders can not use these British Pounds to exchange it for Japanese yen. But, since it is important that both the trades should be complete, thus a margin is calculated for both the trades which is then added together. However, in order to avoid this process, brokers now readily accept margin deposits in different currencies of the world like British Pound. The traders having accounts in foreign banks can most easily make use of this option.

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