•Cross currency pairs, or crosses, are currency pairs that do not involve the U.S. dollar (USD) on either side. Instead, they consist of two major non-USD currencies. For example, the EUR/JPY pair involves the Euro (EUR) and the Japanese Yen (JPY).
Minor Crosses:
•Minor crosses are a subset of cross currency pairs that are actively traded and considered to be major crosses. They are typically derived from the three major non-USD currencies: Euro (EUR), Japanese Yen (JPY), and British Pound (GBP). Examples of minor crosses include EUR/JPY, GBP/JPY, and EUR/GBP. These pairs are still relatively liquid compared to exotics.
Exotic Currency Pairs:
•Exotic currency pairs consist of one major currency and one currency from an emerging or smaller economy. These pairs are often characterized by lower liquidity and wider spreads compared to major and minor pairs. Examples of exotic pairs include USD/TRY (U.S. Dollar/Turkish Lira), EUR/TRY (Euro/Turkish Lira), and USD/SGD (U.S. Dollar/Singapore Dollar).
Key Differences:
•Major pairs always include the U.S. dollar (USD) as one of the currencies in the pair.
•Minor pairs, which are a subset of cross currency pairs, do not include the USD but involve major currencies like EUR, JPY, or GBP.
•Exotic pairs combine one major currency with a currency from an emerging or less frequently traded economy.
Characteristics of Exotic Pairs:
•Exotic currency pairs are characterized by higher spreads, which means higher trading costs.
•They often exhibit greater price volatility compared to major and minor pairs.
•Liquidity in exotic pairs can vary significantly, with some pairs having limited trading activity during certain hours.
•Traders who choose to trade exotic pairs should exercise caution due to the potential for wider price fluctuations and less predictability.
In summary, cross currency pairs (crosses) encompass all currency pairs that exclude the U.S. dollar (USD). Minor crosses are a subset of crosses involving major non-USD currencies, while exotic pairs include one major currency and one from an emerging economy. Traders should carefully consider the characteristics and risks associated with these different types of currency pairs when making trading decisions.