Jan Priewe

How to explain the exchange rate gyrations on the biggest foreign exchange market on the globe

16 Seiten · 3,06 EUR
(Juli 2017)

Ich bin mit den AGB, insbesondere Punkt 10 (ausschließlich private Nutzung, keine Weitergabe an Dritte), einverstanden und erkenne an, dass meine Bestellung nicht widerrufen werden kann.

Introduction:

The dollar-Euro foreign exchange (FX) market – comprising spot and forward markets, swaps, options and others – has a market share in global currency markets of 24%, outpacing the second biggest FX market, the dollar-Yen market with 18% (2013, BIS 2013), The annual turnover of the dollar-Euro market was 34 times the Euro area GDP (2013). Since this market is absolutely unregulated, let alone a few rare central bank interventions, it might be a model of a FX market in a perfectly flexible exchange rate regime. Even though many authors have analysed this market, neither the exchange rates themselves nor the volatility and the dynamics could be explained with econometric methods. Despite many differences, mainstream theories are united in arguing that the short and perhaps even the medium term performance cannot be explained, whereas "fundamentals" reign the long-run (see standard textbooks). There is no explanation of the long short-run chaos, nothing about the alleged eventual switch to fundamentals, and the short long-run which quickly gyrates into new non-fundamental short-runs. This set of theories is in big crisis.

I will show, firstly, the cyclical performance of the dollar-DM and dollar-Euro markets since 1970, with a focus on the latter. Secondly, I use the behavioural approach with heterogeneous agents for a general interpretation of the empirical riddle. Thirdly I analyse empirically the role of standard fundamental variables with attention to the turning points in the exchange rate cycle and, fourthly, develop narratives to explain the exchange rate performance 1999-2015. Admittedly, my explanations are very limited, but I explain why this limitation is the core of the problems. In the conclusion I show that the dollar-Euro exchange rate has far reaching impacts, going beyond the transatlantic trade.