How reliable is the correlation between US interest rates and exchange rates?

How reliable is the correlation between US interest rates and exchange rates?

When interpreting exchange rates based on US interest rate news, should you look at the 2-year or the 10-year rate? Do currencies that have recently shown strong correlation continue to move in the same way afterward? Simply comparing interest rates and exchange rates makes it easy to confuse these two questions.

This article is intended for FX readers who want to organize their reference points when reading interest rate news. By combining Federal Reserve Board exchange rate and interest rate data, we examine the directional consistency of the dollar-yen at specific points in time, compare 2-year and 10-year rates across nine currencies, and analyze the persistence of these correlations under pre-fixed conditions. The text includes comparison tables by period and sensitivity analyses.

The scope is limited to US interest rates and historical reference exchange rates. We have not investigated interest rate differentials with other countries, tradable prices, or future returns. The results are intended as material for reviewing how to interpret news and do not constitute individual trading recommendations or guarantees of future returns.