This paper examines the response of exchange rates and interest rates--U.S. and
foreign--to economic news. The news is associated with the surprise component
of the monthly release of six U.S. macroeconomic variables. The results suggest
that dollar exchange rates systematically react to news about real economic
activity--a surprise of 100,000 on nonfarm payroll employment leads to a 0.2
percent appreciation of the exchange rate. In general, exchange rates do not
react systematically to news on inflation. By contrast, U.S. interest rates
respond to both types of news, although the response continues to be extremely
small, on the order of 1 to 2 basis points. Finally, Japanese interest rates
systematically react, but to a very minor extent, to news about U.S. real
economic activity, while German rates in general do not.
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Last update: July 19, 2001