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Foreign Exchange and Interest Rates

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Although the dollar has been weakening against the euro since early 1996, the euro/dollar exchange rate is currently near its level of a year ago. The dollar also has been strengthening against the yen since mid-1995; it dropped in the fall of 1999, only to begin strengthening again in December 2000. Three-month interest rates in the U.S. exceeded euro-zone 3-month rates from March 1996 until March 2001, implying that the market expected the euro would strengthen against the dollar three months into the future. Since U.S. short-term rates have fallen below euro-zone rates, the market must expect the euro to weaken.

Suggested citation: "Foreign Exchange and Interest Rates," Federal Reserve Bank of Cleveland, Economic Trends, no. 02-03, pp. 08, 03.01.2002.

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