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High-yielding and Low-yielding Currencies

High-yielding and Low-yielding Currencies

High-yielding Currency

A high-yielding currency refers to a currency with a relatively high deposit interest or deposit interest rate in the country to which the currency belongs.

Generally speaking, if the interest rate of a country’s currency is higher than 5%, it can be regarded as a high-yielding currency.

In the foreign exchange market, a currency pair with a currency with a high interest rate is a currency pair with a high interest rate. The more traditional high-yielding currencies are the Australian dollar, in addition to the New Zealand dollar and the British pound.

The interest rate of a currency is used by a country to control the supply of currency to balance the demand for currency, such as the Australian dollar and the New Zealand dollar, which require higher interest rates to attract funds.

Low-yielding Currency

In contrast, a low-yielding currency is a currency with a relatively low deposit interest or deposit interest rate in the country to which the currency belongs. The Japanese yen and the US dollar are typical low-yielding currencies.

Take the yen as an example. Starting from the housing bubble in Japan in the 1990s, the Bank of Japan kept interest rates low for a long time in order to stimulate the economy. Therefore, the yen became a low-yielding currency and the currency with the lowest financing cost in the world.
Therefore, when investment opportunities arise outside of Japan, arbitrage traders can easily obtain huge and cheap yen assets from Japan.

Low interest rates are also one of the main reasons why the yen has become a safe-haven currency.

Carry Trade

Carry trade is one of the most popular fundamental trading methods. It refers to buying high-yieldingcurrencies and selling low-interest-rate currencies, and depositing the high-interest-rate currencies bought into the country’s banks to earn higher than low-interest rates. A form of market speculation in the interest of a currency country.

During the entire trading process, the trader may not only make a profit, but also have an income from the intermediate interest difference. In addition, because leverage is involved in trading, the overall currency trading volume is relatively large, so for traders, the long-term interest spread is also an objective income.

The carry trade starts with the exchange of low-interest currencies into high-interest currencies, the process and means of depositing the high-interest currencies into the country’s banking financial institutions, and ends with the re-conversion of high-interest currencies into low-interest currencies.

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