The Sign Switch Effect of Macroeconomic News in Foreign Exchange Markets
40 Pages Posted: 19 Jan 2013 Last revised: 1 Jun 2015
Date Written: February 15, 2015
We examine an unusual episode in the behavior of the euro, pound and yen exchange rate markets when the dollar appreciated (depreciated) against the three major currencies, in response to unfavorable (favorable) US growth news during the global financial crisis. Contrary to the previous findings, we show that, for each currency pair, only a small subset (about a third) of the most significant macro news effects reversed sign, primarily announcements regarding consumption, credit, labor and housing markets. Our results reveal that announcement chronology within a month matters, in that specifically the earliest releases within an indicator category exhibit sign asymmetry. We explore possible sources of the switch in the exchange rate reaction during this period and find that fluctuations in market risk and carry trade returns explain most of the variation in the news response coefficient signs.
Keywords: Financial crisis, exchange rates, US dollar, macroeconomic news, high-frequency data
JEL Classification: F31, F4, G1
Suggested Citation: Suggested Citation