“Base currency interest rates”

definition

The base currency interest rate in a currency pair is the interest rate set by the central bank that issued the base currency, also known as the transaction currency.

In FX markets, currencies are quoted in relation to other currencies and represented in pairs. In the EUR/USD pair, the euro is the base currency, while the US dollar is the quote currency. In this particular case, the base currency interest rate would be the benchmark interest rate of the European Central Bank.

Interest rates are a fundamental element in currency forward contracts. The differential between the interest rates of the base and quote currencies defines the forward points that are added or subtracted to the exchange rate to determine the forward rate.

 


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