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The objective of this analysis is to determine the movements (long-term trend) of the exchange rate by looking at the rate of return and risk that financial assets (3-month T-bills) have in four different economies, for four different investors. Risk averse speculators will try to maximize their return and minimize risk by investing in different countries, and these capital flows will affect the value of the four currencies (their exchange rates). The empirical results show that before 2001 the return in the U.S. was high and the dollar was appreciated; after 2001, the same return became negative and the dollar was depreciated, but after 2004 the returns have growing positively for the U.S. and relatively the same for the U.K.; the returns for the Euro-zone and Japan are falling. So, the dollar is expected to appreciate, the pound might experience a little appreciation and the euro will fall together with the yen. From this ex post analysis, we can conclude that, by forecasting risk and return in countries’ assets, we can determine the long-term trend of these currencies (exchange rates) in the future. |
