Discount Rates' Affect on Currency Trading

The discount rate is the interest rate that a private bank pays for a loan received from the US Federal Reserve.

Even though there are various currency trading courses that you can use to learn discount rates, perhaps the best way is just to read about it in the papers. This is after learning the basics of discount rates here, of course.

When you hear that the Fed raised discount rates, it means that an increase in the private banks borrow rates from the Federal Reserve has occurred. This course of action is pointed to slow credit expansion, and causes the specific foreign currency quote to drop relative to the USD. Later on you will need to check if the predicted direction in the currency trading quote actually appears.

Of course, for other countries apart from the US, central banks are the ones that lend the funding instead of the Federal Reserve. In the long term, raising discount rates can attract investments, and help strengthen currency trading prices. Various central banks influence discount rates along which manipulation in monetary policies.

Example: If you expect to have $10,000 by next year. This amount is calculated according to a certain interest that will be accumulated during the year's time. If the interest for the year is 5%, then the present amount is calculated according to that discount rate. The same future $10,000 is worth $9,500 if you add in the discount rate.

Posted by Richard Hollar