Forex Market | by Dailyfx.com | Tuesday, 22 June 2010 04:46 UTCUsually the most important factor in the value of a currency is the interest rate environment in that country.
Higher interest rates usually lead to a higher currency value while lower interest rates usually lead to a lower currency value. When the interest rates are rising in one country, investors from around the world will buy that country's currency to invest in the bond market to lock in those higher interest rates. This flow of money has a great influence on the value of that country's currency as the buying interest pushes up the value of that currency.
You can find the interest rate associated with each currency on the first page of DailyFX. Here is today's snapshot.
Interest rates also determine the amount of rollover credited or debited to one's account at the 5PM Eastern close. Rollover is the interest paid or earned for holding an FX position overnight. As we now know, each currency has an interest rate associated with it, and because FX is traded in pairs, every trade involves not only two different currencies, but their two different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade. Traders who look to take advantage of this rollover interest are referred to as carry traders. These carry traders also have a big influence on the value of currencies as those pairs that pay the most in interest generate the most buying interest which in turn, pushes the value of those currencies with higher interest rates even higher.
You can find the rollover amounts in the Simple Dealing Rates window of the FX Trading Station II. Here is an example which shows that a trader would earn 52 cents a day for each EUR/USD standard lot open sell position at the 5PM Eastern close. A trader who has a standard lot open buy position at the 5PM Eastern close would pay $1.49. This is the result of the interest rate associated with the EUR at 1% while the interest rate associated with the USD sits at .25%.
Written by Dailyfx.com
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