This paper investigates to what extent daily movements in the euro/dollar rate
were driven by news about the macroeconomic situation in the United States and
the euro area during the first two years of EMU.
We examine whether market participants reacted to news in different ways
depending on whether the news came from the United States or from the euro area,
and whether the news was good or bad. Furthermore, we investigate whether
traders' reaction to news has changed over time.
We find that macroeconomic news has a statistically significant correlation
with daily movements of the euro against the dollar. However, this relationship
exhibits considerable time variation. There are indications of asymmetric
response, but to different extents at different times. Our results also provide
evidence that the market seemed to ignore good news and remain fixated on bad
news from the euro area, as often claimed in market commentaries, but only for
some time.
