Treasury insights: The impact of recent interest rate and FX trends

For treasury managers, understanding market trends and their impact is crucial for effective risk management and decision-making. Let’s explore recent trends observed in interest rate products and foreign exchange (FX) markets based on open interest, the drivers behind these trends, and how treasury teams can protect their organizations.

Between May 2024 and May 2025, treasury products and currency markets reflected a world-balancing persistent inflation, shifting central bank policies, and geopolitical tensions. Let’s unpack the key trends, the reasons behind them, and what treasurers can do to safeguard their organizations.

1. What are the trends?

Unit: Open interest in million USD
Legend: Red=high | Yellow=moderate | Green=low

A dramatic repricing of risk across both interest rate and currency markets defined the period from May 2024 to May 2025. The data reveals a clear pattern: markets are adjusting to a new macroeconomic regime that is shaped by persistent inflation, diverging monetary policy, and heightened geopolitical risk.

Interest rate instruments

The period from May 2024 to May 2025 marked a significant inflection point, with rate instruments responding sharply to evolving macro signals. The sharp moves in rate instruments reflect a consensus shift away from expectations of imminent easing. Sticky inflation data and mixed signals from central banks reinforced this adjustment, prompting a notable increase in hedging activity and rate sensitivity.

Swap Futures

The most striking movement came from swap futures, which soared by 91 percent, reflecting a surge in demand for hedging against future rate hikes. This is a clear signal that market participants – particularly institutional investors and corporate treasurers – are bracing for continued volatility in the rate environment. The sharp rise in swap futures also suggests that expectations for rate cuts have been pushed further out, with many pricing in a “higher for longer” scenario. The drop (26 percent) from December 2024 to January 2025 may have resulted from year-end position closures.

Overnight indexed swaps

Overnight indexed swaps (OIS) followed closely, rising 27 percent. As OIS rates are highly sensitive to central bank policy expectations, this increase reflects the market’s recalibration of short-term rate paths. A decision by the US Federal Reserve (the Fed) to hold rates steady at elevated levels, despite signs of slowing growth, has kept short-term rate expectations elevated. This has led to a surge in OIS trading volumes as firms seek to manage their exposure to near-term rate moves. The 6 percent drop can be attributed to quarter-end and fiscal year-end effects, as October marks the close of Q3 for many financial institutions. During the same month, usage of the Bank of Englands Short-Term Repo (STR) facility surged to £46.7 billion, signaling strained interbank liquidity and elevated short-term funding costs, which can also contribute towards the drop.

Variance swaps

Variance swaps (VNS), which are used to hedge against rate volatility, rose by 10 percent. This indicates that treasurers are concerned about the direction of rates, and the unpredictability of rate movements. The increase in VNS activity underscores the need for more sophisticated hedging strategies in an environment where traditional rate forecasts are proving unreliable.

Currency markets

Over the past year, global currency markets witnessed dramatic shifts in exchange rates and a profound transformation in open interest – itself a key indicator of market participation and sentiment. As the US dollar began to lose its dominance, open interest data revealed where traders and institutional investors were placing their bets.

British pound and euro

Similarly, the British pound (+29 percent) and the euro (+18 percent) experienced notable increases in open interest. These gains reflect renewed investor confidence in UK and European markets, underpinned by resilient domestic demand and a recalibration of interest rate expectations. The rise in open interest here indicates a broad-based belief in the sustainability of these currencies’ upward trajectories.

In December 2024, GBP open interest dipped due to year-end position rollovers and closures. The Bank of England held rates steady at 4.75 percent, reducing market uncertainty and volatility. This led to the unwinding of speculative and hedging positions.

Japanese yen

The Japanese yen saw an increase of 38 percent in open interest across yen futures and options. This spike suggests that market participants were reacting to the yen’s strength and actively positioning for further gains, likely driven by Japan’s improving economic fundamentals and a pivot in monetary policy.

Indian rupee

Perhaps most striking was the increase in Indian rupee (INR) open interest of +18 percent. Open interest in INR derivatives surged as foreign investors poured capital into Indian markets, attracted by robust GDP growth, stable inflation, and a steady hand from the Reserve Bank of India. The increase in open interest underscores the rupee’s growing role as a favored emerging market currency.

US dollar

Interestingly, while the US dollar posted a nominal gain of +8 percent, open interest data paints a more nuanced picture. Much of the dollar’s strength came from gains against weaker emerging market currencies, while it lost significant ground to major peers.

Exchange rate

While open interest trends reveal where investor conviction is building, exchange rate data from June 2020 to June 2025 paints a more nuanced picture of the US dollar’s performance.

The standout move was in USD/JPY, which climbed from 107.92 to 144.98, marking a 34 percent appreciation. This reflects persistent policy divergence, with the Fed tightening while the Bank of Japan maintained ultra-loose conditions.

In contrast, USD/GBP and USD/EUR showed no clear directional trend over the five-year period. The dollar traded in wide but ultimately range-bound bands: 0.7018–0.9630 against the pound, and 0.8736–1.0487 against the euro. These fluctuations suggest a market driven more by short-term sentiment and macro surprises than by structural shifts.

Together, these exchange rate dynamics and open interest patterns highlight a currency market in flux. Conviction is growing in some areas, but uncertainty still reigns in others.

• USD/JPY rose by 128 percent, a reflection of both yen strength and dollar weakness.
• EUR/USD climbed 83 percent, indicating a strong euro rally.
• GBP/USD surged 57 percent, driven by hawkish signals from the Bank of England.
• USD/INR rose 51 percent, showing that while the rupee strengthened, the dollar’s relative strength in bilateral terms remained volatile.

These movements suggest a broader realignment in global currency markets, driven by shifting capital flows, interest rate differentials, and geopolitical risk. For treasurers, this means increased FX exposure, more volatile cash flows, and a greater need for proactive currency risk management.

2. Reasons for the trends

Central bank uncertainty

One of the most influential drivers of market behavior over the past year is the divergence in central bank policy. The Fed, after a series of aggressive rate hikes in 2022 and 2023, entered 2024 with a more cautious tone. Despite signs of slowing growth, the Fed held rates steady at 5.25 percent–5.50 percent throughout most of the year, citing persistent inflation.

In contrast, the European Central Bank (ECB) and the Bank of England began to ease policy in early 2025. The ECB, responding to falling inflation and weak industrial output, initiated a series of small rate cuts. The BoE followed suit, citing a cooling housing market and declining wage growth.

Inflation reasons

Inflation remained a stubborn challenge globally. While headline inflation began to ease in many advanced economies, core inflation – driven by services and wages – remained elevated. The World Bank noted that energy prices, particularly for LNG and refined petroleum, remained volatile due to geopolitical tensions and supply chain disruptions. This volatility fed into inflation expectations and kept central banks on edge.

The result was a market that remained highly sensitive to inflation data releases. Each CPI print or wage report had the potential to shift rate expectations dramatically, contributing to the surge in OIS and swap futures activity.

Geopolitical tensions

Geopolitical tensions also played a significant role. Russia’s ongoing war in Ukraine continued to disrupt energy markets, while rising tensions in the South China Sea and new US–China trade restrictions added to global uncertainty. These developments increased demand for safe-haven assets like the Japanese yen and Swiss franc, while also prompting firms to reassess their global supply chains.

The US Treasury FX Report highlighted concerns about currency manipulation and intervention by several major trading partners, adding another layer of complexity to FX markets.

These interventions, combined with shifting trade patterns, contributed to the sharp moves in cross-currency pairs like USD/JPY and EUR/USD.

3. Implications on treasury

The volatility and structural shifts in interest rate and currency markets had profound implications for treasury operations. These changes directly affect how companies manage liquidity, funding, risk, and financial performance.

The sharp appreciation of major currencies against the US dollar has increased FX exposure significantly for multinational firms. For companies with US dollar-denominated revenues and foreign currency costs, this led to margin compression. Conversely, firms with foreign earnings saw translation gains, but increased hedging costs often offset these. The extreme moves in currency pairs made it difficult to forecast cash flows and budget accurately.

The surge in OIS and swap futures translated into higher hedging costs and more volatile debt servicing expenses. Companies with floating-rate debt saw their interest expenses rise sharply, while those looking to refinance face a more expensive and uncertain market. Even the modest increases in Interest Rate Swaps (IRS) and Basis Swaps suggest that long-term borrowing costs are creeping up, affecting capital budgeting and working capital strategies.

With both FX and interest rate markets in flux, liquidity forecasting has become more complex and less reliable. Treasury teams must now account for wider swings in cash inflows and outflows, driven by currency fluctuations and changing interest obligations. Stress testing has become a critical tool for regulatory compliance and for operational resilience.

4. How to mitigate these risks

In this new environment, treasury teams must move beyond traditional risk management and adopt a more strategic, data-driven approach.

Advanced treasury management systems (TMS) and AI-powered analytics are now essential tools. These platforms enable real-time exposure tracking, automated hedging execution, and predictive modeling. With the right technology, treasurers can simulate the impact of market moves on cash flow forecasts, debt covenants, and accounting – before they happen. This visibility is critical when markets are moving quickly. For example, if the USD/JPY rate spikes by 5 percent in a single day – as it did during parts of 2025 – treasurers need to know immediately how that affects their net exposure and what hedging actions are required.

The period from June 2024 to May 2025 has been a defining chapter for global treasury management. With interest rate instruments like OIS and swap futures surging, and currency pairs experiencing historic volatility, treasurers have had to navigate a landscape shaped by inflation, central bank uncertainty, and geopolitical uncertainty.

Technology and data-driven models are becoming more important than ever in the life of a treasurer. Treasurers need to embrace that we are in a time of uncertainty and change. So, how do we combat change? By embracing that change, by building resilience through data and technology, and by strengthening our planning!