Currency Correlation

Currency correlation measures how closely two currency pairs tend to move together over a chosen period. It is expressed as a coefficient between +1 and -1: values near +1 mean the pairs usually move in the same direction, values near -1 mean they move in opposite directions, and values near zero mean little relationship. Pairs that share a currency, such as EUR/USD and GBP/USD, often show strong positive correlation. Correlation matters for risk rather than prediction. Holding several strongly correlated positions concentrates exposure to one theme, often the US dollar, so total risk is larger than the position count suggests. Correlations are also unstable: they shift with interest-rate cycles, commodity moves and market stress, so they should be re-measured regularly.