Optimistic and pessimistic economic sentiments and US Dollar exchange rate

Sonia Kumari (), Suresh Kumar Oad Rajput (), Rana Yassir Hussain, Jahanzeb Marwat () and Haroon Hussain ()
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Sonia Kumari: Sukkur IBA University, Sukkur, Sindh, Pakistan
Suresh Kumar Oad Rajput: Sukkur IBA University, Sukkur, Sindh, Pakistan
Rana Yassir Hussain: ��Department of Economics and Business Administration, University of Education Lahore, Pakistan
Jahanzeb Marwat: Sukkur IBA University, Sukkur, Sindh, Pakistan
Haroon Hussain: ��Noon Business School, University of Sargodha, Pakistan

International Journal of Financial Engineering (IJFE), 2022, vol. 09, issue 04, 1-30

Abstract: This study investigates the affiliation of various proxies of economic sentiments and the US Dollar exchange rate, mainly focusing on the real effective exchange rate of USD pairing with three other major currencies (USDEUR, USDGBP, and USDCAD). The study has employed Google Trends data of economy optimistic and pessimistic sentiments index and survey-based economy sentiments data on monthly basis from January 2004 to December 2018. The study engaged Ordinary Least Squares (OLS) and Auto-Regressive Distributed Lag (ARDL) estimation techniques to evaluate the short-run and long-run effects of economy-related sentiments and macroeconomic variables on the exchange rate. The results from the study found that Economy Optimistic Sentiments Index (EOSI) and Economy Pessimistic Sentiments Index (EPSI) appreciate and depreciate the US Dollar exchange rate in the short-run, respectively. Our sentiment measures are robust to survey-based Michigan Consumer Sentiment Index (MSCI), Consumer Confidence Index (CCI), and various macroeconomic factors. The MSCI and CCI sentiments show a long-term impact on the foreign exchange market. This study implies that economic sentiments play a vital role in the foreign exchange market and it is essential to consider behavioral aspects when modeling the exchange rate movements.

Keywords: Economic optimistic sentiments index; economic pessimistic sentiments index; real effective exchange rate; macroeconomic factors; ARDL (search for similar items in EconPapers)
JEL-codes: E44 E71 F31 G14 G4 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2424786321500432

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