by Mark Thoma, University of Oregon (Department of Economics)

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FRB Dallas: Why Are Exchange Rates So Difficult to Predict?

Posted on July 15, 2008

This Economic Letter from the Dallas Fed discusses the relationship between exchange rates and economic fundamentals. Can fundamentals predict exchange rate movements? It depends upon how the question is asked, e.g. how far into the future the forecasts extend, but it doesn't look promising. What about the other way around, can exchange rate movements be used to predict economic fundamentals? The answer here is a bit more positive as there is some evidence that exchange rates are useful in forecasting commodity prices (an NBER Digest on this point follows the Economic Letter):Why Are Exchange ...

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