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February 1985, 
Vol. 67, No. 2
Posted 1985-02-01

The Discount Rate, Interest Rates and Foreign Exchange Rates: An Analysis with Daily Data

by Dallas S. Batten and Daniel L. Thornton

Dallas S. Batten and Daniel L. Thornton investigate two factors often considered important influences on the foreign exchange value of the dollar: credit market conditions across countries and the Federal Reserve’s monetary policy stance. Using daily data on the exchange rates of the U.S. dollar against the Canadian dollar, the French franc, the Deutsche mark, the Japanese yen and the British pound, they find that changing credit market conditions, as reflected by changing nominal interest rate differentials, have had a significant influence on daily exchange rate movements. This impact, however, has been realized only during the period in which the inflation rate has declined. Furthermore, using discount rate changes to proxy changes in Federal Reserve policy, they find that such changes made for other than technical reasons have both a statistically and an economically significant impact on the U.S. dollar exchange rate with the five currencies examined.