This paper explains the unpredictability of exchange rate movements at short horizons and provides a plausible answer on the exchange rate disconnect puzzle. By generalizing Chaboud and Wright's (Journal of International Economics 2005; 66: 349–362) work, it is shown that exchange rates follow a martingale process at short horizons but over long horizons may contain some predictable structure. The empirical results applied to several major currencies of the US dollar support our hypothesis. This evidence is not coincided with the explanation of the inefficient market hypothesis under which exchange rate movements can be predictable in both short and long horizons. Copyright © 2011 John Wiley & Sons, Ltd.