Abstract:
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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