The aim of the paper is twofold: the first one is to examine the theoretical points that constitute
literature on exchange rate market efficiency. We give a quick look to the long run, in which
high or low efficiency results from the adjustment velocity of prices and production in goods
market. We then go to examine literature conclusions about the short run. The second aim is to
test the efficiency for the US dollar against the Euro foreign exchange market with a `news’
exchange rate model using daily data over a period of 19 months. In the model we use, as
proxies of ‘news’, variables generated by the residuals from a VAR model. Our results are
consistent with the hypothesis that the forward exchange rate is not an unbiased predictor of
the future spot rate. That is, we reject the hypothesis of efficiency and we show the
importance of the ‘news’ in determining short-run movements in the exchange rate markets.
The general conclusion we reach is that the euro dollar exchange rate market, from its birth to
august 2000, is not efficient because expectations could not be rational, i.e. operators cannot
predict risks coming from stock exchange and from uncertainty on future values of economic
variables
