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General TradingI
Interest Rate Differential
The difference in interest rates between two countries or currencies. In forex, it drives carry trades and influences currency pair movements, as capital flows toward higher-yielding currencies.
Example
“For example, if U.S. interest rates are 5% and Japanese rates are 0.1%, the 4.9% interest rate differential drives carry traders to borrow yen and buy dollars, strengthening USD/JPY.”