Macroeconomic News and the Euro/Dollar Exchange Rate

This paper investigates to what extent daily movements in the euro/dollar rate were driven by news about the macroeconomic situation in the USA and the euro area during the first two years of EMU. We examine whether market participants reacted to news in different ways depending on whether the news came from the USA or from the euro area, and whether the news was good or bad. Furthermore, we investigate whether traders' reaction to news has changed over time. We find that macroeconomic news has a statistically significant correlation with daily movements of the euro against the dollar. However, this relationship exhibits considerable time variation. There are indications of asymmetric response, but to different extents at different times. Our results also provide evidence that the market seemed to ignore good news and remain fixated on bad news from the euro area, as often claimed in market commentaries, but only for some time. Finally, we find evidence that the impact of macroeconomic news on the euro/dollar rate was stronger when news switches from good to bad or vice versa. Copyright Banca Monte dei Paschi di Siena SpA, 2003

[1]  Andreas Gottschling,et al.  The reaction of exchange rates and interest rates of news releases , 1998 .

[2]  M. Eichenbaum,et al.  Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates , 1993 .

[3]  Michael Melvin,et al.  Trade balance news and exchange rates: Is there a policy signal? , 1991 .

[4]  Christian C. P. Wolff.  Exchange rates, innovations and forecasting , 1988 .

[5]  Bong-Soo Lee,et al.  Permanent, Temporary, and Non-Fundamental Components of Stock Prices , 1998, Journal of Financial and Quantitative Analysis.

[6]  M. Chinn,et al.  Tracking the Euro's Progress , 2000 .

[7]  W. Bailey.  Money Supply Announcements and the Ex Ante Volatility of Asset Prices , 1988 .

[8]  Michael Melvin,et al.  Sources of meteor showers and heat waves in the foreign exchange market , 1994 .

[9]  Humberto López,et al.  Global Equilibrium Exchange Rates: Euro, Dollar, 'Ins', 'Outs', and Other Major Currencies in a Panel Cointegration Framework , 1999, SSRN Electronic Journal.

[10]  J. Galí,et al.  Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks? , 1994 .

[11]  T. Mills,et al.  RANDOM WALK COMPONENTS IN OUTPUT AND EXCHANGE RATES: SOME ROBUST TESTS ON UK DATA , 1989 .

[12]  W. Landsman,et al.  When is Bad News Really Bad News? , 1999 .

[13]  L. Ederington,et al.  How Markets Process Information: News Releases and Volatility , 1993 .

[14]  R. MacDonald,et al.  EXCHANGE RATES AND THE “NEWS: SOME EVIDENCE USING U.K. SURVEY DATA , 1988 .

[15]  Bernd Schnatz,et al.  The Determinants of the Euro-Dollar Exchange Rate - Synthetic Fundamentals and a Non-Existing Currency , 2000 .

[16]  Takatoshi Ito,et al.  News from the U.S. and Japan: Which moves the yen/dollar exchange rate? , 1986 .

[17]  Ethan S. Harris,et al.  The Employment Report and the Dollar , 1995 .

[18]  Jacob A. Frenkel,et al.  Flexible Exchange Rates, Prices, and the Role of "News": Lessons from the 1970s , 1981, Journal of Political Economy.

[19]  Craig S. Hakkio,et al.  THE REACTION OF EXCHANGE RATES TO ECONOMIC NEWS , 1985 .

[20]  P. Korteweg,et al.  Exchange rate variability and monetary policy under rational expectations: Some Euro-American experience 1973–1979 , 1983 .

[21]  S. Edwards.  Exchange rate market efficiency and new information , 1982 .

[22]  Tim Bollerslev,et al.  Dm-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies , 1996 .

[23]  Catherine Bonser-Neal,et al.  Central bank intervention and the volatility of foreign exchange rates: evidence from the options market , 1996 .

[24]  G. Meredith.  Why Has the Euro Been so Weak? , 2001, SSRN Electronic Journal.

[25]  R. E. Shrieves,et al.  Public information releases, private information arrival and volatility in the foreign exchange market , 1997 .

[26]  L. Copeland.  The pound sterling/US dollar exchange rate and the 'new' , 1984 .

[27]  E. Elton,et al.  Economic News and Bond Prices: Evidence from the U.S. Treasury Market , 2001, Journal of Financial and Quantitative Analysis.

[28]  G. Hardouvelis,et al.  Economic News, Exchange Rates and Interest Rates , 1988 .

[29]  N. Roubini,et al.  Liquidity and Exchange Rates: Puzzling Evidence from the G-7 Countries , 1995 .

[30]  C. Engel,et al.  Why interest rates react to money announcements: An explanation from the foreign exchange market , 1984 .

[31]  Manmohan S. Kumar,et al.  Exchange Rates and Capital Flows , 2001, SSRN Electronic Journal.

[32]  T. Bollerslev,et al.  Deutsche Mark–Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies , 1998 .

[33]  R. MacDonald.  SOME TESTS OF THE RATIONAL EXPECTATIONS HYPOTHESIS IN THE FOREIGN EXCHANGE MARKET , 1983 .

[34]  Martin Eichenbaum,et al.  Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates , 1995 .

[35]  Francis X. Diebold,et al.  Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange , 2002 .

[36]  A. Rose,et al.  A Survey of Empirical Research on Nominal Exchange Rates , 1994 .

[37]  Bradford Cornell,et al.  Using the Option Pricing Model to Measure the Uncertainty Producing Effect of Major Announcements , 1978 .

[38]  Dennis L. Hoffman,et al.  The Impact of News and Alternative Theories of Exchange Rate Determination , 1985 .

[39]  Richard Payne,et al.  The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior , 1998, Journal of Financial and Quantitative Analysis.