Target Interest Rate News Spillover Effects on the Asia-Pacific Currency Markets

Abstract

This paper examines the spillover impacts of the U.S. Fed’s and the European Central Bank (ECB)’s target interest rate news on the first two moments of the Asia-Pacific exchange rates against the US dollar and the euro over the period 1999-2006. The spillover effects on the mean are generally consistent with the literature where a majority of currencies depreciates against the USD and the EUR in response to unexpected rate rises. Both the Fed and the ECB news elicited tardy or persisting volatility responses. The Fed’s news tends to send a leading signal upon the upcoming decision of the ECB, while the ECB’s news tends to confirm the Fed’s decision. This relationship between the news tends to help reduce volatility in the Asia-Pacific currency markets.