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Chapter 22, Part I. Cross Pair – What the Beast is That? Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 22, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Why crosses?


    Pipruit: So, Sir, one thing that I can’t still catch is why trade crosses? What superb qualities do they have, compared to major pairs?​


    Commander in Pips: To understand it, let’s remember what we’ve talked about in initial chapters, when we’ve discussed the statistics of the Forex market. As we’ve said, 90% of all transactions involve the US Dollar. Also the US Dollar is a reserve currency and its share is around 64% of the overall world’s currency reserves.


    Pipruit: I remember how that happened, but why currently is the reserve currency not changing?​


    Commander in Pips: In fact, it is. There is some flow from USD to EUR is ongoing, but this process is very slow and demands restructuring of world markets. The exceptional role of the USD is caused by the world merchant processes. Precisely speaking, the USD is the primary currency that is serving those processes. The point is that all major commodities and financial assets are traded in USD. Yes, we have exchanges as in Europe as well as in Asia, but their turnover is relatively small, compared to US Exchanges. Liquidity of the other exchanges is also less that those in the US. Hence, if some country wants to buy something, they can mostly do it only using USD, and when it sells something, it also does it mostly for USD also. If countries do an exchange of domestic currency into USD and then out from USD each time when they need to buy or sell something, they will spend much more time for that. We will skip such uncomfortable issues as currency risk, transaction costs and others. So, it’s much simpler to hold some part of a country’s assets as currency reserves. Since for the most part of global merchant deals are served by USD, hence most part of global currency reserves are held in USD also. That’s the answer. Some countries that have huge positive trading balance and the major buyer of their goods is the US have huge US dollar reserves – China and Japan are greatest among them.
     
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