Interest rates are the cost of borrowing money - and the return on holding it. When you hold a currency, you earn interest on it; when you borrow a currency, you pay interest on it. In the global forex market, international capital relentlessly moves toward whichever currency offers the highest risk-adjusted yield.
Course 09 · Lesson 03
Interest Rates and Currencies
~8 min read•Lesson 03/14
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Global capital moves toward higher yields, driving long-term currency appreciation.
Sovereign yield spreads lead currency pair trends over multi-month horizons.
KEY TERMS
Benchmark Rate
The central bank policy rate that sets the baseline cost of borrowing throughout the economy.
Fed Funds Rate
The benchmark overnight lending rate set by the US Federal Reserve FOMC.
Yield Spread
The differential between sovereign government bond yields of two different nations.
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