Understanding how letter units represent particular speech sounds is a crucial skill for developing competent reading skills. However it is not known whether such phonological ability is constrained by basic auditory capacities such as those necessary for detecting the frequency modulations characteristic of many phonemes. Here we show that nearly 40% of the variability in normal children's phonological and reading skills can be predicted from their sensitivity to 2 Hz frequency modulated (FM) tones. This relationship does not hold for sensitivity to 240 Hz FM. Because lower but not higher rates of FM provide information important for speech comprehension, dynamic auditory sensitivity is likely to play an important role in children's phonological and reading skill development.