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Excess comovements between the euro/US dollar and pound sterling/US dollar exchange rates

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  • Michael Kühl

Abstract

The aim of this article is to discuss excess comovements of the euro/US dollar and pound sterling/US dollar exchange rates, i.e. we look for comovements of exchange rates which are stronger than implied by the fundamentals. The results of the empirical analysis provide evidence that excess comovements exist for the two exchange rates. A long-run analysis of correlations can verify that a link exists between the correlation dynamics of exchange rates, relative inflation rates, long-term interest rates, economic sentiments and money supply. We find that common movements of money supply, prices and economic sentiments each play a major role in comovements of the exchange rates. From the investigation of the two exchange rates, we conclude that macroeconomic fundamentals can account for the comovement but that common non-fundamental factors also have major significance for the exchange rates.

Suggested Citation

  • Michael Kühl, 2018. "Excess comovements between the euro/US dollar and pound sterling/US dollar exchange rates," Applied Economics, Taylor & Francis Journals, vol. 50(34-35), pages 3664-3685, July.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:34-35:p:3664-3685
    DOI: 10.1080/00036846.2018.1436146
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    Cited by:

    1. Timo Bettendorf & Reinhold Heinlein, 2023. "Connectedness between G10 currencies: Searching for the causal structure," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 3938-3959, October.
    2. Lee, Taehyun & Moutzouris, Ioannis C & Papapostolou, Nikos C & Fatouh, Mahmoud, 2023. "Foreign exchange hedging using regime-switching models: the case of pound sterling," Bank of England working papers 1042, Bank of England.

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