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For immediate release: July 14, 2008

Understanding Difficult-to-Predict Exchange Rates Vital in Globalization Era, Says Dallas Fed Report

DALLAS—While globalization presents a new urgency to understanding the factors that move exchange rates, the June issue of the Federal Reserve Bank of Dallas’ Economic Letter says a quarter-century quest hasn’t found the elusive links between currency values and economic fundamentals.

In “Why Are Exchange Rates So Difficult to Predict?” senior economist Jian Wang says studies find no definitive evidence that any economic fundamental can forecast exchange rates for nations with similar inflation rates. “Currency values are difficult to predict, and economic fundamentals offer little help,” Wang writes.

Recent studies indicate exchange rate models’ predictability may actually run in the opposite direction; the models’ real value may be in forecasting economic fundamentals, according to the author.

“Making wise decisions when conducting international business and economic policies requires a better understanding and modeling of exchange rates,” Wang states.


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