The empirical tendency of higher interest rate currencies’ return to outperform the return of lower rate currencies. This can be measured, over a specific period of time, as the appreciation in the higher interest rate currency over and above the expected value derived from the pricing of currency forward contracts. According to the uncovered interest arbitrage theory, forward exchange rates are unbiased predictors of future spot exchange rates, and therefore the expected return from a forward contract is equal to zero.

However, since the collapse of the Breton Woods system in the early 1970s, and the resulting floating rate regime, the forward exchange rates of the world’s main currencies have been based on larger predicted changes in the spot rates than actual changes. Forward contracts that have traded at discounts have resulted in positive returns on average, whilst those traded at premiums have produced negative returns on average. This observed tendency is also known, in currency markets, as “carry”. It can also be viewed as an “alternative beta”, which investors seek in the same way they seek beta itself.