25 Jun 2025
Rodolphe Bohn
FX and Commodities Strategist, HSBC Global Private Banking and Wealth
In the FX market, the US dollar (USD) is the standard to measure international exchange rates (e.g. EUR/USD, GBP/USD), as the liquidity and size of the USD market make it the primary currency for many countries’ reserves and global trade and finance. However, there is growing interest in cross currencies nowadays.
The exchange rate of two currencies, without using the USD, is commonly known as a cross-currency pair, such as EUR/GBP, EUR/JPY, GBP/CHF or AUD/NZD. In practice, investors can exchange one currency for another without buying USD as an exchange currency.
IIIustration of how cross currency pairs are built
For instance, by looking at the performances of EUR versus different currencies, we notice that it performed better against some and not as well against others.
EUR’s past performance depending on the counter currency
For personal aspirations – For customers based outside of the US, cross-currency exchanges are needed for travelling, overseas property purchases, paying for children’s education abroad and retirement in foreign countries, to name a few. There are many reasons for customers to hold currencies other than the USD.
For hedging and investing – There could be some advantages to the use of cross currencies to hedge against currency risk, as not all currencies move in the same direction. Investing in different currencies can increase diversification and potential returns for portfolios, reducing reliance on a single currency.
There are also some investment products that link the performance of two different currencies, allowing customers to enjoy a higher return than a normal foreign currency time deposit. Normally, investors would choose the two currencies that concern them the most or they have a view on. For more experienced investors, they may capture arbitrage opportunities by exploiting the price discrepancies between currency pairs for better returns.
Risks to note
Overall, investors could consider cross-currency opportunities if they want to limit their exposure to the USD, or when they have assets or liabilities denominated in other currencies than the USD. However, it is important to note that domestic factors, such as GDP growth, inflation, unemployment data, the central bank monetary guidance and political situations, could impact the outlook for the domestic currency. Importantly, the relative performance of these factors across countries can be even more relevant when assessing the future moves of cross-currency pairs. Since the FX market is fast-moving, investors should evaluate the risks and opportunities of cross currencies to align their investment goals with their risk tolerance.
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