Discount rate changes and the foreign exchange market

Changes in the discount rate can have associated announcement effects on the foreign exchange value of the dollar only if these changes are not anticipated by the market. This paper provides evidence to support this contention. Specifically, discount rate changes made for reasons other than technical adjustments have not been anticipated fully and, consequently, their announcements have had a significant impact on the dollar's exchange rate. Furthermore, results are obtained that support the hypothesis that unanticipated discount rate changes alter inflationary expectations.