Euro-Treasury Correlation

The first chart shows two ETFs, iShares 20+ Year Treasury (TLT) and the inverse of CurrencyShares Euro (FXE) in orange, going back a decade. Usually, FXE is inversely correlated with TLT. Since the summer, this flipped. The second chart shows TLT and FXE (not inverted) in blue.

The connection is rising interest rates, which right now are driving down the price of treasury bonds and the EURUSD exchange rate. In normal times, rising interest rates are accompanied by faster credit and economic growth around the world, and the "dollar expansion cycle" is bearish for USD exchange rates. The reverse, a global recession and credit contraction, drives up USD exchange rates. For the moment, the rise in interest rates is based on optimism, not hard data. All else equal, higher interest rates in the U.S. and consistent economic fundamentals leads to a higher USD exchange rate.

As for the future, EURUSD looks similar to SEKUSD over the past couple of years.

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