Foreign Exchange and Interest Rates A - Z

Frequently asked questions about the foreign exchange and interest rate market.

Interest rates affect currency prices and vice versa. Find out more about interest rates and currency here.

Interest rates affect currency prices and vice versa. Find out more about interest rates and currency on this page.

What are interest rates and the NOK exchange rate?

The interest rate can be defined as the cost of borrowing money, i.e. the price you pay to borrow.

As a rule, the interest rate is stated as a percentage of the total amount you are borrowing.

An interest rate can also be income. It’s the return you get when you save, either in an account or in fixed-income funds or other fixed-income securities.

Example of loan interest rates:

You take out a loan for NOK 100 000 at a 4 per cent annual interest rate. This means that you need to pay NOK 4000 per year to borrow the money. When borrowing, the interest rate becomes an annual cost.

Example of savings interest rates:

When you save in a bank account or invest in fixed-income securities, you’re the one lending your money. As compensation for the loan, you receive a rate of interest. The interest you receive varies between different types of bank accounts, as well as different types of fixed-income securities. When you lend money, the interest becomes an income.

A key policy rate is an interest rate set by a central bank in order to impact the economy of a country. The interest rate can be reduced to stimulate growth or raised to curb growth in the country’s economy.

The goal of a central bank is to keep the economy relatively stable. The interest rate is their “tool” to make this happen.

Read more about growth and inflation further down.

The central bank offers banking services to the banks of a country. They offer loans and investments of capital. Norges Bank is the central bank of Norway and offer services to Norwegian banks, such as DNB.

For example, the key policy rate set by Norges Bank can be used to stimulate business growth. By reducing the key policy rate, the banks can borrow cheaply from the central bank and then lend the money to private individuals and businesses. Lower interest rates make it more attractive to invest in new projects and jobs.

The central bank can also increase the key policy rate to curb growth in consumption and money lending. The reason for not wanting consumption to be too high is that this can lead to price increases of goods and services that are too high. Another word for price increases is inflation. Read more about inflation on Investopedia.

The central bank’s key policy rate affects the economy by influencing the interest rate in the money market, in Norway’s case the NIBOR. The money market interest rate affects the exchange rate and the interest rates that the banks offer their customers.

You can read more about the key policy rate on Norges Bank’s website.

Effective and nominal rate are terms used when you borrow money.

The nominal rate is the stated interest rate on a loan before any fees are taken into account and is normally stated as an annual interest rate (per annum, or p.a., which means per year).

The effective rate is the nominal interest rate plus fees and other costs. This tells you the actual price of the loan.

Always compare the banks’ effective rate, not the nominal rate, when looking for a loan!

The NOK exchange rate shows how many Norwegian kroner you need to pay to get one unit of another currency.

For example, if the NOK exchange rate against the US dollar is 8.5, you need to pay 8.50 kroner for every dollar you buy. The price of a product that costs 10 dollars at an NOK exchange rate of 8.5 per USD will be: 10 x 8.5 = 85 NOK.

The NOK exchange rate varies against other currencies and is fluctuating all the time.

What does it mean when the krone strengthens or weakens?

If the kroner strengthens this means that the price of another currency has become lower. In other words, the Norwegian krone has strengthened if the price of one dollar has decreased from 8.5 to 8.0 kroner.

If the kroner weakens this means that the price of another currency has become higher. In other words, the Norwegian krone has weakened if the price of one dollar has increased from 8.5 to 9.0 kroner.

When the krone exchange rate is strengthened, the result is cheaper products abroad. When the krone exchange rate weakens, products abroad become more expensive.

Businesses wishing to sell their products internationally prefer a weak krone. Their products then become cheaper and thus more attractive to buyers.

Businesses wanting to purchase products from foreign countries prefer a strong krone. This way products are as cheap as possible.

The NOK exchange rate is affected by supply and demand for the Norwegian krone. If there is high interest to buy kroner and fewer people want to sell, the krone strengthens.

When the interest rates in Norway are high compared to other countries, it’s beneficial for international investors to move their money to Norway. High Norwegian interest rates can therefore contribute to a stronger krone. High oil prices also have this effect – a high oil price will also attract international investors to Norway, and they will need Norwegian kroner in order to invest.

What do these words and acronyms mean in foreign exchange trading?

Foreign exchange trading is a form of spot trading.This means that after the completed trade, you receive the currency you’ve bought in the account after the trade date + two working days.

Physical delivery of currency is used to convey that the currency you have bought has come in to the account. If you need the currency to make a payment in foreign currency, you will need a “physical delivery”. As a rule, the delivery is not made physically in notes or coins, but into a currency account.

Speculators in the currencies market are not interested in a physical delivery of currency, but in exposure to the market in order to benefit from price fluctuations. Therefore, they close their positions and open them again on a daily basis to avoid physical delivery. This process is called rolling of positions.

Gearing involves borrowing money from the bank in order to increase potential profits. By gearing a deposit in a margin account, it is possible to trade at higher amounts than the deposit itself. In other words, with a deposit of NOK 100 000 with a gearing factor of 25x, it is possible to take positions of up to NOK 2 500 000.

The reason that traders want to gear their investments is that the fluctuations in the currencies market are usually not as large as in the stock market, for example. Gearing always carries a high risk. The higher the gearing, the greater the risk of losing all of the capital that has been deposited. Foreign exchange trade gearing can be done via the DNB FX Trader platform.

An open position can be closed at any time by making the opposite trade (a counter transaction).

If you have bought EUR 100 000 and paid in NOK, you can sell EUR 100 000 and get paid in NOK to close the position.

When closing the position, the position is ended and the result of the closure is posted against the margin account. By closing a position you are no longer exposed to price fluctuations.

A ‘Stop loss’ order can be used to set an upper limit to the loss on a position.

If you buy 100 000 EURNOK at 1.22 and set a stop loss of 1.20, the position will be closed in the market when it reaches this level, without you having to do anything.

If you are in a short position (have sold 100 000 EURNOK), you earn money on price weakening. In other words, you will lose money if the price strengthens. Your stop loss is therefore above the level you have sold at if your position is short.

We recommend our customers to actively use a Stop loss. The reason for this is that unforeseen movements can occur at any hour of the day, and thus result in major losses if a stop loss order is not in place.

A ‘Take Profit’ order can be used to lock in profits on an open position.

If you buy 100 000 EURNOK at 1.22 and set a take profit order at 1.24, the position will be closed in the market when it reaches this level, without you having to do anything. You therefore ensure a profit without having to do anything yourself.

If you are in a short position (have sold 100 000 EURNOK), you earn money on price weakening. In other words, you will lose money if the price strengthens. Your take profit is therefore below the level you have sold at if your position is short.

We often recommend our customers to use Take profit. It is often a good idea to lock in profits in case the market should turn again.

Foreign exchange trading is a form of spot trading.This means that after the completed trade, you receive the currency you’ve bought in the account after the trade date + two working days.

Physical delivery of currency is used to describe that the currency you have purchased has access to an account. If you need the currency to make a payment in foreign currency, you will need a “physical delivery”. As a rule, the delivery is not made physically in notes or coins, but into a currency account.

Speculators in the currencies market are not interested in a physical delivery of currency, but in exposure to the market in order to benefit from price fluctuations. Therefore, they close their positions and open them again on a daily basis to postpone the physical delivery. This process is called rolling of positions.

The reason that traders want to gear their investments is that the fluctuations in the currencies market are usually not as large as in the stock market, for example.

Gearing always carries a high risk. The higher the gearing, the greater the risk of losing all of the capital that has been deposited

Liquidity describes how easy it is to access a currency. If there are few sellers and buyers, the market is thin, and can fluctuate more when participants trade. More trade volume means more liquidity. Said in another way: It is easier to buy or sell in a liquid market , and the difference between the bid and ask price is usually smaller.

The currencies market is normally referred to as very liquid.

A ‘Stop loss’ order can be used to set an upper limit to the loss on a position.

If you buy NOK 100,000 of EUR 1.22 and set a stop loss of 1.20, the position will be closed in the market when it reaches this level, without you having to do anything.

If you lie short (have sold NOK 100,000), you’ll earn money for the exchange rate deviation. In other words, you will lose money if the price increases. Stop loss is therefore above the level you have sold on if your position is short.

We recommend our customers to actively use Stop-loss. The reason for this is that unforeseen movements can occur at any time of the day, and thus result in major losses if a stop loss order is not in place.

A ‘Take Profit’ order can be used to lock in profits on an open position.

If you buy NOK 100,000 of EUR 1.22 and set a take profit of 1.24, the position will be closed in the market when it reaches this level, without you having to do anything. You therefore secure the profit without having to do anything active.

If you lie short (have sold NOK 100,000), you’ll earn money for the exchange rate deviation. In other words, you will lose money if the price increases. Therefore, "Take profit" is below the level you have sold on if your position is short.

Interest rate setting - market making FAQ

Day-to-Day Market rate is a standardised and neutral interest rate fixing for the individual currency type. The rate is quoted daily at fixed times in the market for the currency in question.

If the bank uses a different source, this will represent a rate that is published, and which is generally used in the market for the currency type in question. For currencies where there is no official fixing or well-developed market for interest rates, the bank is obliged to set the rate itself.

See summary on this page, or here.

Every banking day, in most countries with a well-developed interest rate market, a selected panel of banks quote interest rates for different time periods. Based on the interest rates provided by the banks, the panel calculates an interest rate for each of the different time periods, which then becomes the average interbank interest rate in the currency in question. For example, USD is called the LIBOR rate.

The basis is available on the following websites:

USD: https://www.federalreserve.gov/monetarypolicy/openmarket.htm

EUR: http://www.euribor-rates.eu/

SEK: http://www.riksbank.se/sv/Rantor-och-valutakurser/Sok-rantor-och-valutakurser/

DKK: http://www.nationalbanken.dk/DNDK/Valuta.nsf/side/Pengemarkedsrenter!OpenDocument

GBP/ Sonia Interest Rate Benchmark SONIA is administered by the Bank of England and is published at 09:00 the following working day in London.

JPY Bank of Japan calculates and publishes TONAR. Click here for the Bank of Japan: TONAR

CHF: Swiss Average Rate Overnight (SARON) is an average of overnight interest rates which refer to the Swiss franc CHF. Click here.

NZD: RBNZ OCR - Reserve Bank of New Zealand Official Cash Rate. RBNZ OCR - observations

Foreign exchange trading and international payments

International payments of amounts exceeding NOK 100 000 (in foreign currency or Norwegian kroner) must be reported to the tax authorities. In these cases, information must be given on what the amount relates to. In such cases, information must be provided on what the amount applies to.

The additional information is reported by supplementing the transaction with a payment type code. You must also include a short description of what the transfer is for. You must also enter a short text stating what the transfer concerns.

You will find a full summary of the codes on the Norwegian Tax Administration’s website

It is our responsibility as a bank to report this, hence we will do this for you.

The Currency Register Act requires all banks and financial institutions to report all international transactions to the Norwegian Tax Administration. The reporting requirement applies to both corporate customers and retail customers. The reporting requirement applies to both corporate and personal customers.

For international transactions with a value of NOK 100 000 or more, a payment type code is required to supplement the transfer.

You will find a summary of the payment type codes on the Norwegian Tax Administration’s website.

Contact information foreign exchange and interest rates

Are you looking for:

International transfers
Opening a foreign currency account*

*Note: Currency accounts for private individuals are neither a savings or placement account nor intended for currency calculations. Currency accounts are for retail customers who receive income/fees in foreign currency or need an account for operating expenses in connection with property abroad. Documentation of this is required.

Contact DNB customer service by phone +47-915-04800 or by email to 04800@dnb.no

DNB does not offer foreign bank notes or set a rate for cash sales.

Are you looking for:

Opening a foreign currency account*
Foreign exchange for international transfers

*Note: A currency account is a deposit account in a currency other than NOK. A currency account is offered to corporate customers who have current income and expenses in a foreign currency and where the transactions are made in the form of a payment transfer abroad. Documentation may be required.

Get in contact with DNB Bank on +47 915 04800 or by email: kundesenter.bedrift@dnb.no

Visit the foreign exchange and interest rate product page here.