LIBOR stands for London Interbank Offered Rate—the average interest rate at which major banks lend to each other in the interbank market. It is a global benchmark used to price loans, derivatives, and other financial instruments worldwide.
How LIBOR is calculated
Each day, the ICE Benchmark Administration surveys leading banks about the rates they believe they can borrow funds at. LIBOR is calculated by averaging these submissions. The rate is published for multiple currencies (USD, GBP, EUR, JPY) and time periods (tenors) ranging from overnight to 12 months.
Why it matters for forex traders
Interest rates are a core driver of currency values. When LIBOR changes, it shifts the benchmark cost of borrowing, which can influence central bank policy and currency movements. Rising LIBOR typically signals tightening credit conditions, which can strengthen the US dollar relative to other currencies.
The manipulation scandal
In the 2010s, LIBOR's credibility was damaged when banks were found to have submitted false rates to benefit their own trading positions. This scandal prompted regulators worldwide to scrutinize the benchmark more closely and seek alternatives.
LIBOR today
Despite past controversies, LIBOR remains widely used for pricing existing financial contracts. Regulators have encouraged a shift toward alternative benchmarks like SOFR (Secured Overnight Financing Rate), which are based on actual transactions rather than bank submissions.
