The credit squeeze has swept currency markets into another period of volatility. The instability – and tendency for currency pricing to skew away from any connection with reality – is exacerbated by a feature of foreign exchange trading that has received little attention: how interest rates are handled.

No interest is paid or received on the “intraday” deals that make up 90 per cent of currency trading. The headline overnight interest rates, which central banks set in an effort to influence the markets, apply only to the 10 per cent of positions that are rolled over to the next day.