Forward premium anomaly
Forward premium anomaly
The forward premium anomaly, also called the forward premium puzzle, is a well-documented pattern in currency markets. It notes that currencies with higher domestic interest rates often appreciate rather than depreciate. This contradicts the simple idea that the expected change in the exchange rate should offset the interest rate differential between two countries (the uncovered interest rate parity idea).
In plain terms: higher domestic interest rates do not always mean the domestic currency is expected to fall. Instead, the currency sometimes strengthens, which is why this effect is seen as a puzzle.
Many explanations have been proposed, including risk premia (investors needing extra compensation for currency risk), time-varying risk, market frictions, and carry-trade dynamics. Yet there is no single agreed-upon explanation.
This page was last edited on 3 February 2026, at 12:42 (CET).