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Inside the Currency Market: Mechanics, Valuation, and Strategies by Brian Twomey

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Reserve versus Funding Currency Pairs

Before we look into the bond-price yield scenario, it's important to understand the currency-pair arrangement as it relates to a bond. Currency pairs are arranged as financing mechanisms to fund cross-border trade, to finance government bonds in whatever nation's currency, and used as a means for carry trades.

Carry trades fund one side of a currency pair by selling one interest rate currency for another. The Japanese yen was the most popular funding currency over the years, due not only to its low interest rate but continuous drop in interest rates. The yen was then paired with Australian dollar, British pound, euro, Swiss franc, U.S. dollar, New Zealand dollar, and Canadian dollar in this general manner, ...

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