Macroeconomic News and the DM/$ Exchange Rate

Abstract

Empirical confirmation that the effect of macroeconomic fundamentals on exchange rates is economically important has been scarce. This paper employs a general GARCH specification with asymmetric responses to investigate the effect of 35 U.S. and German macroeconomic news announcements on the daily DM/$ exchange rate over the 1980-1998 period. We conclude that FX rates are strongly connected to real and nominal sector developments in both countries, and that real sector announcements influence the exchange rate more strongly than money or inflation announcements. We find that surprisingly high real growth appreciates the exchange rate and raises yields.