Analysts at Brown Brothers Harriman explained that there are many considerations that impact currency prices, but the interest rate differential often tracks the movement.
Key Quotes:
“To be sure, it is not as if a particular interest rate differential corresponds with a particular exchange rate. Rather we find the change in the interest rate differential often points to the direction of the currency movement.
Our work finds that typically the dollar-yen rate enjoys a higher correlation with 10-year interest differential than the two-year differential.
Over the past 60-days, for example, the percentage change in the two-year spread has a 0.27 correlation with percentage change dollar-yen, while ten-year spread correlation is 0.43. The former is at the lower end of its range (half of what it was in early December) while the latter is at the upper end of the recent range).
Typically, we find the US two-year premium over Germany is more closely correlated with the euro-dollar exchange rate though presently the correlations are almost identical.”
(Market News Provided by FXstreet)