The interest rates associated with individual currencies are one of the most obvious yet least-understood forces in the foreign exchange marketplace. Their most negative effects capture public attention during carry-trade bubbles, such as the recent (summer 2007) rise — and then abrupt fall — of the New Zealand dollar versus the Japanese yen. But day-to-day, currency traders are misled by a broken market mechanism that encourages pricing to skew away from any connection with reality. In the following interview, Richard Olsen, co-foun der of OANDA, discusses this little-understood issue. The solution he recommends – and has put into practice at Olsen Ltd. and OANDA, the prominent online forex brokerage he founded in 1995 — is continuous interest-rate payment, second-by-second, on all open positions. Continuous interest makes the yield component of every currency transaction real. In a marketplace where fundamentals are few and far between, an d where pricing tends to lack any fundamental frame of reference, continuous interest will help stabilize markets and enable incremental intervention to avoid valuation free-falls…
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Daniel North