Experienced stock and futures traders moving over to the Spot FX market for the first time typically will look for any similarities between the markets they are familiar with and currency market. They soon find that there is a very important common point and that is interest rates. Typically rising interest rates will lead to a stronger currency while falling interest rates will lead to a weaker currency. One of the main reasons for this is that international money managers look for the highest yielding paper in the most secure financial markets. So if the German Bund is yielding more than the US Treasury counterpart, these money managers will sell their US Treasuries, sell their US Dollars to buy Euros and invest in the German Bund market. The chart below is a daily chart of the EUR/USD with one year of trading activity. We have also plotted the highs and lows of the 10-year US Treasury Note yield to see if there is indeed any relationship between the US interest rate environment and the value of the USD when compared to the EUR. Since this is the EUR/USD, a rising market would indicate USD weakness, while a falling market would indicate USD strength. We can see where the highs and lows of the 10-year yield do indeed suggest that there is a relationship with the strength/weakness of the US Dollar. The currency pair typically falls as the yield moves higher and rises as the yield moves lower. There is not a perfect relationship as we are only looking at the US side of the interest rate environment, but it is quite obvious that the reason for the US Dollar weakness has been falling interest rates in the US while interest rates remained steady in Europe. So if you trade bond futures or the stock market and have been following interest rates, the move over to the FX market is not as much of a change as one might think.

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