Interest Rate Differential
a.k.a. IRD, Rate differential
The gap between the interest rates of two currencies, a major driver of exchange rates and of swap costs.
In plain English
The gap between the interest rates of two currencies, a major driver of exchange rates and of swap costs.
The interest rate differential is one rate minus another. If US rates are 4% and Japanese rates are 0.5%, the differential is 3.5 points in the dollar's favour.
Money tends to flow toward the higher-yielding currency, which is the engine of the carry trade. The differential also sets the overnight swap you pay or earn on a position. Shifts in expected differentials often move currencies more than the current rates do.
Keep this word for good
Your free Private Swap Lounge saves the terms you’ve learned and quizzes you on them. Portal under construction. Expected delivery date is December 01, 2026.