Wren-Lewis moves the forex market

As always, however, foreign exchange traders discovered enough to move their markets.

Much to the surprise of Simon Wren-Lewis, the University of Exeter economist who contributed the foreign exchange study, the pound dropped about a cent against the euro within hours of his report’s release. Why? He’d estimated that the pound should be valued at about E1.37 to achieve a long-run balance in Britain’s current account should the country adopt the currency. So traders took the pound down a little closer to Wren-Lewis’s 1.37 figure, regarding it as an unofficial target.

But Wren-Lewis says that the market’s got the timing all wrong. Equilibrium exchange rates, he explains, are like long-term trend lines in the stock markets -- values will track their direction over time but frequently diverge, often radically, for shorter periods. Traders, he notes, just aren’t “used to thinking about the next five years.”

As if to emphasize the divide between academia and the trading community, some dealers complained that Wren-Lewis expressed the equilibrium rate in euros to the pound rather than the market’s conventional pounds per euro. Sighs the professor, “I kind of thought people in the markets could divide.”

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