Understanding Currency Pairs and Cross Rates

In a currency pair like EUR/USD, the first currency (EUR) is the base and the second (USD) is the quote. A rate of 1.0850 means one euro costs 1.0850 dollars. Major pairs all include USD, while cross pairs like EUR/GBP or AUD/JPY do not. Exotic pairs combine a major currency with one from a developing economy, such as USD/TRY or EUR/ZAR, and typically have wider spreads and higher volatility. Cross rates between two non-USD currencies can be calculated through USD as an intermediary. For example, if EUR/USD is 1.0850 and GBP/USD is 1.2650, then EUR/GBP is 1.0850 divided by 1.2650, giving approximately 0.8577.