Determining the EUR/USD exchange rate with U.S. and German government bond yields in the post-crisis period

Research output: Contribution to journalArticle

Abstract

This research shows how U.S. and German government bond yields can determine the EUR/USD exchange rate in the short run. After presenting the discussion on fundamental, technical and microstructure approach exchange rate determination models, a conclusion is made that out of the components of fundamental models the interest rates could be the best determinants for explaining exchange rate fluctuations in the short term. For the research the mostly traded currency pair, the EUR/USD, was chosen and 2-year, 10-year U.S. and German government bond yields were selected as determinants of the exchange rate. After performing the linear regression procedure it has shown that the model can determine 5 per cent of the daily EUR/USD fluctuations with a change in 2-year U.S. government debt yield being the greatest determinant in the model. It affects the exchange rate as it is stated in the uncovered interest rate parity model – when the yield increases, the USD declines against the euro and vice versa. Another finding is that an increase in the German 10-year government bond yield increases the price of the euro and the increase in the U.S. 10-year debt yield leads to an appreciation of the USD.
Original languageEnglish
Pages (from-to)150-155
JournalIntelektinė ekonomika: mokslo darbai
Volume9
Issue number2
DOIs
Publication statusPublished - 2015

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Exchange rates
Bond yields
Government bonds
Linear regression
Uncovered interest rate parity
Debt
Exchange rate fluctuations
Interest rates
Fluctuations
Government debt
Microstructure
Exchange rate determination
Currency
Short-run

Keywords

  • Exchange rates
  • Exchange rate determination
  • Interest rates

Cite this

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title = "Determining the EUR/USD exchange rate with U.S. and German government bond yields in the post-crisis period",
abstract = "This research shows how U.S. and German government bond yields can determine the EUR/USD exchange rate in the short run. After presenting the discussion on fundamental, technical and microstructure approach exchange rate determination models, a conclusion is made that out of the components of fundamental models the interest rates could be the best determinants for explaining exchange rate fluctuations in the short term. For the research the mostly traded currency pair, the EUR/USD, was chosen and 2-year, 10-year U.S. and German government bond yields were selected as determinants of the exchange rate. After performing the linear regression procedure it has shown that the model can determine 5 per cent of the daily EUR/USD fluctuations with a change in 2-year U.S. government debt yield being the greatest determinant in the model. It affects the exchange rate as it is stated in the uncovered interest rate parity model – when the yield increases, the USD declines against the euro and vice versa. Another finding is that an increase in the German 10-year government bond yield increases the price of the euro and the increase in the U.S. 10-year debt yield leads to an appreciation of the USD.",
keywords = "Exchange rates , Exchange rate determination , Interest rates",
author = "Natalja Lace and Irena Macerinskiene and Andrius Balciunas",
year = "2015",
doi = "10.1016/j.intele.2016.02.006",
language = "English",
volume = "9",
pages = "150--155",
journal = "Intellectual Economics",
issn = "1822-8011",
publisher = "Mykolo Romerio Universitetas",
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AU - Lace, Natalja

AU - Macerinskiene, Irena

AU - Balciunas, Andrius

PY - 2015

Y1 - 2015

N2 - This research shows how U.S. and German government bond yields can determine the EUR/USD exchange rate in the short run. After presenting the discussion on fundamental, technical and microstructure approach exchange rate determination models, a conclusion is made that out of the components of fundamental models the interest rates could be the best determinants for explaining exchange rate fluctuations in the short term. For the research the mostly traded currency pair, the EUR/USD, was chosen and 2-year, 10-year U.S. and German government bond yields were selected as determinants of the exchange rate. After performing the linear regression procedure it has shown that the model can determine 5 per cent of the daily EUR/USD fluctuations with a change in 2-year U.S. government debt yield being the greatest determinant in the model. It affects the exchange rate as it is stated in the uncovered interest rate parity model – when the yield increases, the USD declines against the euro and vice versa. Another finding is that an increase in the German 10-year government bond yield increases the price of the euro and the increase in the U.S. 10-year debt yield leads to an appreciation of the USD.

AB - This research shows how U.S. and German government bond yields can determine the EUR/USD exchange rate in the short run. After presenting the discussion on fundamental, technical and microstructure approach exchange rate determination models, a conclusion is made that out of the components of fundamental models the interest rates could be the best determinants for explaining exchange rate fluctuations in the short term. For the research the mostly traded currency pair, the EUR/USD, was chosen and 2-year, 10-year U.S. and German government bond yields were selected as determinants of the exchange rate. After performing the linear regression procedure it has shown that the model can determine 5 per cent of the daily EUR/USD fluctuations with a change in 2-year U.S. government debt yield being the greatest determinant in the model. It affects the exchange rate as it is stated in the uncovered interest rate parity model – when the yield increases, the USD declines against the euro and vice versa. Another finding is that an increase in the German 10-year government bond yield increases the price of the euro and the increase in the U.S. 10-year debt yield leads to an appreciation of the USD.

KW - Exchange rates

KW - Exchange rate determination

KW - Interest rates

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