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Economic Policy Review: Analyses of Exchange Rate Dynamics and Treasury Market Trends
|April 22, 2004|
|Note To Editors||
The latest edition of the Federal Reserve Bank of New York’s Economic Policy Review is now available, featuring two articles on exchange rate dynamics and two on the U.S. Treasury market.
The articles are:
Exchange Rates for the United States
Goldberg constructs several industry-specific exchange rate indexes for the United States and analyzes the extent to which each index moves with, or diverges from, aggregate economywide measures. She finds that the effect of U.S. dollar moves on profits can be more precisely identified when using the industry-specific indexes: dollar appreciations reduce corporate profits, while depreciations stimulate them. Broader exchange rate indexes fail to capture the majority of the moves.
The database with industry-specific exchange rates for the United States, and the alternative construction methods for different applications, is available online.
Linda S. Goldberg is a vice president and economist at the Federal Reserve Bank of New York.
Rate Changes and Net Positions of Speculators in the Futures
Klitgaard and Weir note that macroeconomic models--which often are based on interest rates, prices, and GDP--can help explain exchange rate changes over long horizons, but do a poor job of tracking daily, weekly, or monthly changes. Economists, taking a cue from currency traders, increasingly are looking at transaction-related data to better understand short-term exchange rate dynamics. One such data set is the net position of speculators in the futures markets. The net position--contracts to buy a foreign currency at a future date minus contracts to sell the same currency--is often watched by market analysts, who interpret its movements as a proxy for speculators’ changing views of the short-term direction of exchange rates.
Klitgaard and Weir use data from the Chicago Mercantile Exchange to analyze the relationship between speculators’ net positions and exchange rates for six currencies from 1993 to 2003. The authors find that knowing the direction of the change in the net position in a particular currency, one would have a 75 percent chance of correctly guessing the exchange rate’s direction over that same week.
Thomas Klitgaard is a research officer and economist and Laura Weir is a vice president at the Federal Reserve Bank of New York.
of Treasury Note and Bond Auctions, 1970-1975
The Treasury traditionally auctioned bills, but prior to 1970 it relied on fixed-price offerings of notes and bonds, in part because two attempts to auction long-term bonds--in 1935 and 1963--had failed. Auction sales generally were considered a more efficient and cost-effective way to offer securities, and the Treasury moved in that direction in the early 1970s.
Garbade offers three reasons for the Treasury’s turnaround:
Kenneth D. Garbade is a vice president and economist at the Federal Reserve Bank of New York.
Inflation-Indexed Debt: A Review of the U.S. Experience
Brian Sack and Robert Elsasser explain that over most of the post-1997 period, yields on TIIS have been surprisingly high relative to yields on comparable nominal Treasury securities. The spread between indexed and nominal yields has fallen, on average, well below survey measures of long-run inflation expectations.
Sack and Elsasser attribute the low relative valuation of TIIS over this period to several factors: investor difficulty adjusting to a new asset class, divergent supply trends between TIIS and nominal Treasuries, and the lower liquidity of indexed debt. In addition, they observe that investors may have had a benign outlook for inflation and may not have demanded much, if any, of an inflation risk premium to hold nominal securities.
More recently, though, TIIS market liquidity and the breadth of investor participation have increased markedly, and the valuations of TIIS relative to nominal Treasury securities appear to have improved.
Brian Sack is chief of the Monetary and Financial Market
Analysis section of the Board of Governors of the Federal
Reserve System and Robert Elsasser is a vice president at
the Federal Reserve Bank of New York.