CURRENCY EXCHANGE-RATE FORECAST AND INTEREST-RATE DIFFERENTIAL

In this article the author tests the conventional wisdom that expected changes in interest rate differentials are largely responsible for short-term changes in currency exchange rates. He finds that historical data support the conventional wisdom. He also finds that forward portfolios constructed following the conventional wisdom, and a simplified version of it, would have been profitable in at least thirty-seven of the sixty one-month investment horizons in the simulation period. These findings indicate that viewing currencies as an asset class is both viable and desirable.