Forex · Pro · 4 min

Correlations between currency pairs

You can explain why many currency pairs move together or in opposite directions, and how that hides concentrated risk in a portfolio of trades.

Three trades, one bet

A trader opens three positions in three different currency pairs and feels well diversified. Then a single piece of US news moves the dollar, and all three positions lose at the same time.

In forex, pairs are not independent. They share currencies, and therefore share drivers. This lesson explains how pairs relate to each other, and why counting trades is not the same as counting risks.

Shared currency, shared risk

Correlation measures how closely two prices have moved together in the past. It ranges from +1, always in the same direction, to −1, always in opposite directions. Zero means no consistent relationship.

In forex, correlation often comes from a shared currency:

Same direction: EUR/USD and GBP/USD both price a European currency against the dollar. When the dollar weakens broadly, both tend to rise.
Opposite direction: USD/CHF has the dollar as the base currency. When the dollar weakens, EUR/USD tends to rise while USD/CHF tends to fall.
Shared drivers: currencies of countries with similar economies, or that react the same way to risk appetite, often move together.

The BIS survey shows the dollar on one side of almost nine in ten trades, so many pairs share at least one common driver.

For risk, this means:

Several positions that are all long or all short the same currency behave like one large position.
Two positions in opposite-correlated pairs can largely cancel each other out, along with any profit.

Correlations are not fixed. A central bank surprise or a crisis can affect one currency much more than another and break a long-standing relationship within days, as episodes like August 2024 showed.

1% × 3 = 3%

A fictional trader risks 1% of the account on each of three trades:

long EUR/USD,
long GBP/USD,
long AUD/USD.

All three are bets against the dollar. A strong US jobs report lifts the dollar across the board, and all three stops are hit within minutes. Instead of three separate 1% risks, the trader had one 3% risk on the dollar. Planning with correlation in mind, the trader would have treated the three as one position and sized each at about a third.

Common mistakes

Counting pairs as separate risks. Shared currencies link them.
Hedging with an opposite-correlated pair by accident. It can cancel your trade.
Assuming correlations stay stable. They can break quickly.
Ignoring the dollar. It sits in most major pairs.

The takeaway

Pairs that share a currency often move together. Three trades against the dollar can be one big bet. Correlations also change over time.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the pair that often moves in the opposite direction to EUR/USD.

Tap the chart.

In USD/CHF, the dollar is the base. When the dollar weakens, EUR/USD tends to rise and USD/CHF tends to fall.
2A trader buys EUR/USD, GBP/USD and AUD/USD. What is the main risk?

If the dollar rises, all three positions lose at the same time.
3What does a correlation of +0.9 between two pairs mean?

Correlation ranges from −1 to +1. It describes the past, not a promise.
4Why can correlations suddenly change?

Correlations depend on what drives each currency. When drivers change, so do the relationships.

of 4 correct.