NOBODY KNOWS ANYTHING–FOREIGN EXCHANGE RATES.

NOBODY KNOWS ANYTHING—FOREIGN EXCHANGE RATES. The phrase “Nobody knows anything” was famously used as a refrain by William Goldman in ADVENTURES IN THE SCREEN TRADE. Goldman used the phrase to emphasize that movie professionals can’t predict whether a movie will be a success. This article in The Economist (in the always excellent Economics Focus section) describes how difficult it is to explain or predict foreign exchange rates. Kids, you should bear this in mind whenever you see confident predictions of exchange rate movements (for example, predictions that the dollar must decline because the United States has a large current account deficit.). Morgan Stanley uses thirteen different models to value currencies based on variables which have correlated best with exchange rate movements in the past. Having thirteen models is tantamount to saying “nobody knows anything.”. Interestingly, the median result of the thirteen models says that the dollar is undervalued against the Euro by about 15%; that is, a Euro should be worth about $1.15 rather than the actual value today of $1.34. People who give great weight to the large American trade deficit argue that the Euro should be worth a lot more than $1.34. Nobody knows.