Exchange rates

June 20, 2012

One of the things we teach in the Global Economy course is that exchange rates between major currencies are inexplicable.  If you have to forecast them, it’s hard to do better than no change, a 50-50 bet on up and down.  Some students find it strange that we admit ignorance so readily, but having tried and failed to do better we’ve fallen back on honesty.  Anyone who says they know better is either bluffing or smarter than the rest of us.

I’m sure they know this, but banks routinely produce exchange rate forecasts.  Is it for the entertainment value, like sportscasters predicting the outcomes of games?  If not, are they bluffing or smarter than the rest of us?  Joe Foudy sends this wonderful graph of euro/dollar forecasts, which says, in essence, that if they’re smarter, then they’re smarter in wildly different ways.  The average forecast is no change, which is where I’d put my money.

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