Abstract

Technical Causes of Short-term Exchange Rate Movements

Extreme fluctuations of exchange rates like those again observed recently are ascribed in the more recent literature primarily to changes in the expectations of the market participants. The circumstance is disregarded, however, that the foreign exchange market transactions undertaken on the basis of changed expectations will give rise at a later date to counterreactions as soon as open speculative commitments have been settled. The extent to which such counterreactions influence the exchange rate trend is dependent on the one hand on whether they were preceded by spot or forward speculations: In view of the small degree of flexibility of market participants in the case of forward speculations, it can be expected that counterreactions to them will generally cause more distinct exchange rate effects than spot speculations. On the other hand, this phenomenon is likely to be decisive for the exchange rate trend whenever the volume of speculative transactions which fall due at a specific time is very large and, in addition, the counterreaction occurs in an otherwise quiet market on which the resulting supply of or demand for spot exchange cannot be met, or only inadequately, at the prevailing exchange rate. The selected empirical example gives initial indications that at least from time to – time the counterreactions to speculative transactions have no inconsiderable influence on the exchange rate trend and at that not just from day to day, but over relatively long periods. This is linked up with various implications: For example, the observability of this phenomenon contradicts those hypotheses of rational expectation. formation which assume that the available quantity of information also contains the decisions of all market participants in the past. Under incomplete information, however, the monetary authorities’ possibilities of exerting influence are greater than often assumed, especially in times in which the described counterreactions dominate market events. If only for this reason, the latter should be given greater attention