What Is a Carry Trade? Interest Rates and Currencies

The carry trade is one of the best-known ideas in currency markets. It links exchange rates to something that sounds far less exciting: interest rates. Understanding it helps explain why some currencies move sharply when central banks change course.

The basic idea

In a carry trade, an investor borrows in a currency with a low interest rate and uses the money to hold a currency with a higher interest rate. If exchange rates stay roughly where they are, the investor earns the difference between the two rates — the “carry”.

How it shows up for currency traders

When a forex position is held overnight, many providers apply a financing adjustment based on the interest rate difference between the two currencies. Depending on the direction of the trade and the rates involved, this can be a small credit or a charge. Each provider publishes its own rates.

Why it can go wrong

The carry only works if the exchange rate doesn’t move against the position by more than the interest earned. Currency moves can easily outweigh months of carry. When many investors hold the same carry trades and markets turn nervous, they may rush to close them at once, causing a sharp reversal — often described as the carry trade “unwinding”.

What moves carry trades

• Central bank decisions and expectations about future rates
• Inflation and growth data that change those expectations
• General risk appetite: carry trades tend to be popular in calm markets and unwound in stressful ones

Our guide to the economic calendar shows when the relevant data are scheduled, and what is forex trading covers the broader market.

Educational content only. Interest rate and currency movements are uncertain, and leveraged trading carries a high risk of loss.