Absolute Rate
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The fixed portion of an interest-rate swap, expressed as a percentage rather than as a premium or a discount to a reference rate. - Absolute Rate
The forex absolute rate is a combination of the reference rate and the premium or discounted fixed percentage. For example, if the LIBOR is 3% and the fixed interest portion of the swap is at a 7% premium, the absolute rate is 10%.
It is sometimes also referred to as an absolute swap yield.
Despite the dollar’s absolute rate advantage over some currencies (CAN, JPY and CHF), it is the expectations of further currency losses that is expected to erode the remaining rate differential. The fact that the US fed funds rate, now at 4.75%, is higher than its counterpart in Canada (4.50%), Eurozone (4.00%), Japan (0.50%) and Switzerland (2.75%), the anticipated reduction –and erosion — of the U.S. yield advantage is the main driver of the dollar’s deepening losses, which outweigh the current yield advantage of the dollar over these currencies. A 25-bp Fed cut this week will bring US rates to the same level as Canada for the first time since February 2005 and reduce the dollar’s yield advantage over that of the Eurozone to the lowest level also since February 2005. Thus, FX carry trades not only thrive on the anticipated reduction in a nation’s interest rate other nations, but also in the resulting decline in the value of that currency ahead of further rate reductions.
Absolute Rate