Yield is the return earned on an investment, typically expressed as an annual percentage. In forex, yield most commonly refers to the interest rate on a country’s government bonds or the central bank’s policy rate. Yield differentials between two countries are a primary driver of currency pair movements and determine swap rates. Higher-yielding currencies tend to attract capital inflows and appreciate, all else being equal.
The US Federal Reserve sets rates at 5.25% while the Bank of Japan holds at 0.5%. The 4.75% yield differential makes USD/JPY attractive for carry trades — traders buy USD (high yield) against JPY (low yield) and earn the daily swap credit reflecting this gap.
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