Interest rate differential (IRD) in the context of foreign exchange (FX) refers to the difference between the interest rates of two countries' currencies that are paired together in a currency trade.

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It is calculated by subtracting the interest rate of one country from that of another. For example, if the interest rate in the US is 4% and in Japan is 1%, the IRD between USD and JPY is 3%.

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Interest rate differentials are a key factor in FX carry trades, where investors borrow in a low-interest-rate currency and invest in a high-interest-rate currency to earn the difference.

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