Predictability of Foreign Exchange Rates

Title: PREDICTABILITY OF FOREIGN EXCHANGE RATES

Abstract:

The objective of this research is to study in detail the concept of predictability in exchange rates, with reference to the period before and after the Bretton Woods System of fixed exchange rate. Also, an attempt has been made to highlight the factors that have varied between these two periods and thus, have resulted in the variability of exchange rate predictability. Simultaneously, the implications of predictability of exchange rates have also been identified so that measures can be taken to reduce the erratic behavior of exchange rates.

Acknowledgements

I am thankful to all my faculty members, colleagues and the organization I am employed at for providing me with an opportunity to study the change in predictability of exchange rates in the Bretton Woods era and after it. I am also much obliged to my supervisors who guided me with their timely advice, feedbacks and suggestions which aided me in attaining the expected standard of work and keeping me punctual as per the scheduled deliveries of dissertation chapters.

Table of Contents

Serial no. Topic Page no.

I Introduction, Aims & objectives and Research Questions 6

I.1 Introduction 6

I.2 Aims 6

I.3 Objectives 6

I.4 Research Questions 7

II Literature Review 8

III Research Methodology 15

IV Findings and Analysis

V Discussions

VI Conclusion and Recommendations for future Research

References

List of figures

Figure no. Topic Page no.

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List of Appendices

Serial no. Topic Page no.

Appendix A

Appendix B

Appendix C

Appendix D

I. Introduction, Aims and Objectives and Research Questions:

I.1 Introduction:

The collapse of the Bretton Woods System of fixed exchange rate in 1978 ushered in the new era of flexible exchange rate that aimed for the betterment of trade relations between countries. Free and floating exchange rate were assumed to be the solution to the barriers to free trade and hence, the newly acquired ideals of globalization. What remained uncalculated was the instability and lack of predictability associated with flexible exchange rates. In the aftermath of the Global Crisis of 2007, the predictability of exchange rates has evolved as one of the most relevant issues and pleads minute scrutiny and analysis.

I.2 Aims:

The objective of this research is to examine the depreciations, appreciations and devaluations in the value of the US Dollar relative to other major currencies and based on this analysis; draw a general conclusion on the degree of predictability of exchange rates in recent times. Furthermore, it attempts to identify the main factors responsible for the volatility of exchange rates following the collapse of the Bretton Woods System and thus, offer a clear insight into the various mechanisms existent in the context of exchange rate predictability.

I.3 Objectives:

The main objectives of the research are:

 To compare the differences in the stability and predictability of exchange rates before and after the collapse of the Bretton Woods System of fixed Exchange rates.

 To study the variations in the value of exchange rate of US, with respect to other major currencies and based on this, gauge the relative increase or decrease in the stability and predictability of exchange rates.

 To identify the reasons for the changing degree of predictability in exchange rates.

 To study the implications of the varying degrees of predictability of exchange rates, in terms of international trade, stability of domestic markets and other relevant matters.

I.4 Research Questions:

The questions posed in a research paper are of the prime importance for obtaining the desired objectives of the research. Whether or not a research is being conducted in a proper way depends on whether or not the questions being asked are relevant. If the questions are directly aimed at explaining the key issues of the paper, the research can be depended upon to give precise and accurate results. Thus, attainment of a balanced and well justified inference, supported by proper evidences and statistical figures, becomes possible. The research questions given below will help in the process of analyzing the degree of predictability in the international exchange rate market in recent times, by studying the case of variations in the US exchange rate, relative to other countries.

 What was the general level of predictability of exchange rates in the pre-era and post-era of the collapse of the Bretton Woods System in 1978?

 Has predictability of exchange rates increased or decreased before and after the Bretton Woods regime?

 How has the predictability of the US Dollar varied over time, relative to other important currencies?

 What are the main causes of varying degrees of predictability in exchange rates?

 What