by Summary:
One recurrent line of discussion I have seen over the years are assertions or questions about currency values that follow this format: if some particular economic event happens, then the currency will rise (or fall). This seems to be the result of "all else equal" logic, but it is highly misleading. Foreign exchange markets are markets, and prices (exchange rates) should not be expected to follow simple rules. Otherwise, all foreign exchange traders would end up with above average profits, and we would have discovered a private sector magic money tree. Interestingly enough, I think it would be a safe bet that one could find professors teaching undergraduate economics who will argue that currency values will follow simple "all else equal" rules in one lecture, and then go to another
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One recurrent line of discussion I have seen over the years are assertions or questions about currency values that follow this format: if some particular economic event happens, then the currency will rise (or fall). This seems to be the result of "all else equal" logic, but it is highly misleading. Foreign exchange markets are markets, and prices (exchange rates) should not be expected to follow simple rules. Otherwise, all foreign exchange traders would end up with above average profits, and we would have discovered a private sector magic money tree. Interestingly enough, I think it would be a safe bet that one could find professors teaching undergraduate economics who will argue that currency values will follow simple "all else equal" rules in one lecture, and then go to another
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Mike Norman considers the following as important:
This could be interesting, too:
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One recurrent line of discussion I have seen over the years are assertions or questions about currency values that follow this format: if some particular economic event happens, then the currency will rise (or fall). This seems to be the result of "all else equal" logic, but it is highly misleading. Foreign exchange markets are markets, and prices (exchange rates) should not be expected to follow simple rules. Otherwise, all foreign exchange traders would end up with above average profits, and we would have discovered a private sector magic money tree.
Interestingly enough, I think it would be a safe bet that one could find professors teaching undergraduate economics who will argue that currency values will follow simple "all else equal" rules in one lecture, and then go to another lecture and state that some version of market efficiency holds. Consistency is the hobgoblin of small minds, &c.Bond Economics
The Currency Market Is A Market. Act Accordingly.
Brian Romanchuk