What Is US Dollar Index
It is the calculation of the value of US dollar in relation with other most significant currencies which form a pair with US dollar. US dollar index is similar to those trade weighted indexes using the exchange rates of the same most significant currencies. The six major currencies of the world are taken in these calculations that are the Euro, Canadian dollar, Swiss Franc, British Pound, Japanese Yen and Swedish Krona. The US dollar Index started in 1973 and is calculated by factoring the exchange rates of these major currencies. In the beginning the base value of the US dollar index was 100 and so if it raised to 120 then it shows that U.S dollar index has shown 20% increase of original base value.
Cross Currency is the term that explains those transactions in which a currency pair is traded without including the US dollar. In Cross Currency, one currency is exchanged with another without requiring exchange into US dollars. Earlier, currency exchange transactions required the use of US dollars. A currency was first converted to the US dollars and then the US dollars were converted to the second currency so the whole process was having one step more. The concept of Cross Currencies helps the traders and investors to bypass this step. For example, the first cross was between GBP and JPY and with this cross the concept of Cross Currency was invented. GBP is the currency of England and JPY is the currency of Japan and when the people of England and Japan wanted conversion of their currencies, they converted directly without conversion into US dollars.
You have analyzed the charts carefully and found that Canadian Dollar is looking good against the British Pound and you decided to trade but when you looked in your trading platform, you found that your broker doesn’t offer CAD/GBP so what to do now. Are you going to change your broker? It may not be a good decision because the time you take in selecting a Forex Broker and opening an account with the same may be sufficient enough in which the trend reverses and the opportunity is missed out. What should be the next best alternative? Are you going to miss this wonderful opportunity? If not, then how can you cash this opportunity? The answer is very easy; you can do this trading using the Synthetic Pairs.
A Synthetic Pair is formed from the combination of two different currency pairs involving US dollar in each pair. The combination of these currency pairs is made in such a way that US dollar cancels out from both the pairs and the trader is left with the currency pair including the two currencies that he wanted to trade in. For example, as seen above the trader wanted to trade in CAD/GBP that was not offered by the Broker so now buy two currency pairs that are CAD/USD and USD/GBP. Buy these two currency pairs at the same time and same in position sizes. The catch in this logic is only to buy both the currency pairs at the same time and in same position size. You can open a currency trading account and trade US Dollar against other currency paris.