Exchange Rates and Capital Flows

Abstract

This paper explores the ability of portfolio and foreign direct investment flows to track movements in the euro and the yen against the dollar. Net portfolio flows from the euro area into U.S. stocks—possibly reflecting differences in expected productivity growth—track movements in the euro against the dollar closely. Net FDI flows, which capture the recent burst in cross-border M&A activity, appear less important in tracking movements in the euro-dollar rate, possibly because many M&A transactions consist of share swaps. Movements in the yen versus the dollar remain more closely tied to such conventional variables as the current account and interest differential.Capital flows;exchange rate, exchange rates, bonds, bond, exchange rate movements, bond flows, bilateral exchange rate, government bonds, dollar exchange rate, corporate bonds, multilateral exchange rate, bilateral exchange rates, stock returns, stock prices, government bond, net bond, current accounts, currency markets, foreign exchange, stock markets, current account balance, currency exchange, bond yields, foreign bond, corporate bond, home currency, financial markets, currency exchange rates, stock market, international finance, exchange rate economics, exchange rate determination, equity markets, financial institutions, effective exchange rate, international capital, multilateral exchange rates, exchange rate dynamics, exchange rate instability, stock ownership, hedge, exchange rate developments, effective exchange rates, government bond yields, stock adjustment, financial sector, foreign investment, exchange rate behavior, stock valuations, currency areas, financial system, foreign equity, international currency