Interest Rate Differential

In Forex, an interest rate differential (IRD) is a difference in the interest rate between two currencies in a pair for pricing purposes.

For example, if the Australian dollar has an interest rate of 4.25%, and the U.S. dollar has an interest rate of 2%, it has a 2.25% interest rate differential.

IRD is one of the most important components in the carry trade. A carry trade is a strategy for traders when they try to profit from the interest rate difference. If a trader is long in a currency pair, they may get profit from the rise of the currency pair.