Exchange rates, in simple terms, is the valuation of 1 currency in relation to a

Question

Exchange rates, in simple terms, is the valuation of 1 currency in relation to a second currency. As many of you have stated, various factors play into this valuation from interest rates, inflation rates, expectations (economic growth, consumer spending, national deficits, monetary policies, etc), political stability, etc. A by-product of this is cross rates, which usually arises because the currency in question is not often traded, so no quotes are maintained and is, therefore, a derivative calculation of currencies it trades with. In general, a falling rate (value) of a currency is bad news because its purchasing powers declines and it means that confidence has been lost. Conversely, it could mean that confidence in the opposing currency has improved. Can you please expound?

Explanation / Answer

A cross rate is the currency exchange rate between two countries, both of which are not the official currencies of the country in which the official exchange rate quote is given in. This is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in.

For example, if an exchange rate between the euro and the yen was quoted, this would be considered as cross-rate in this context, because neither the euro nor the yen is the standard currency of the U.S.

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