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U.S. Exchange Rates and Currency Flows

Listed author(s):
  • Rime, Dagfinn

    (Swedish Institute for Financial Research)

After the Meese & Rogoff 1983-results, researchers have searched with torch for macroeconomic variables with predictive power on horizons shorter than 6 months. Recently, several papers have showed that order flows influence exchange rates intradaily. Maybe order flow may be of importance also for lower frequencies than intraday, like the weekly frequency? In this paper I test a trading model where order flow may be informative due to the existence of private information, and where there are important macroeconomic public information as well. Using weekly data for spot and options trading in the U.S., the model is tested for five exchange rates against US Dollar. For three of the exchange rates, DEM/USD, GBP/USD and CHF/USD, I find that order flow is an important variable for explaining weekly changes in exchange rates. The coefficients are both statistically and economically significant, and have intuitive sign. When U.S. banks sell foreign currency, the foreign currency depreciates.

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Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 4.

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Length: 33 pages
Date of creation: 15 Dec 2001
Handle: RePEc:hhs:sifrwp:0004
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