AN EMPIRICAL AND THEORETICAL ANALYSIS OF THE CORRELATION BETWEEN THE LONDON INTERBANK OFFERED RATE (LIBOR) AND FOREIGN EXCHANGE RATE VOLATILITY

This scientific study explores the historical and structural relationship existing between the London Interbank Offered Rate (LIBOR) and foreign exchange rates (FX). Being one of the main indicators of short-term interest rate internationally, LIBOR has been an essential variable in the international scene of finance, affecting the movement of capital, policies of the carry trade, and the pricing of the major currency pairs. Based on the International Fisher Effect (IFE) and Uncovered Interest Rate Parity (UIRP) framework, this paper will explore the effects of the LIBOR on the USD/GBP and USD/EUR currency pairs in the past 20 years. The analysis also examines the post-2015 transition to the SDR of LIBOR to Risk-Free Rates (RFRs) such as SOFR and SONIA, as such a move transformed the historical pattern of currency correlation. The results are that, although the direct correlation was high when the economy was stable, the correlation was no longer linked in the 2008 Financial Crisis and the following quantitative easing. The paper ends the discussion by examining the changing world of global standards and their applicability in the future to the efficiency of the FX market.