The Informational Content of Consumer Expectations on the Direction of Exchange Rate Movements

This paper shows that the University of Michigan’s ”Survey of Consumers“ can be useful in predicting the direction of change in five U.S. dollar exchange rates. The explanatory power, however, is contingent on the particular survey question employed and the forecast horizon under consideration. The study finds that the survey question regarding car purchases does especially well in predicting the future direction of exchange rate movements. Furthermore, the results generally indicate that the survey is more useful when making distant (i.e., 12‐month ahead) currency forecast than for making near term (i.e., 3‐month and 6‐month ahead) predictions.