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Foreign Exchange Volatility and Yields Movements in Eurozone

This paper studies the impact of yields movements on the long-term sovereign bonds on foreign exchange volatility in the Eurozone from the beginning of 2003 to the end of 2013. Using such a period of time allowed us to carry out separate analysis before and after the global financial crisis. Namely, today in the world of free financial flows the exchange rate is one of the most important indicators of the country’s stability. After the emergence of the global financial crisis, state stability is again in the main focus of investors. The Eurozone countries rocked the debt crisis after the global financial crisis. One of the specificities of the Eurozone compared to the rest of the world is that a common currency exists, while all member states are issuing government bonds individually and have a separate fiscal policy. With the arrival of turbulence in financial markets, investors have different perceptions of the quality of government bonds of member countries. A change of government bond yields indicates, also, a change in the perception of risk of investing in the financial assets of countries from the Eurozone. This changed perception of risk is causing the movement of capital among countries and consequently is resulting in a change in the Euro and US dollar exchange rate. The results of our empirical study proved that three member states have the greatest impacts on the movement of capital between Euro and Dollar assets: namely Luxembourg, the Netherlands and Germany.

Foreign exchange ; Yields ; Volatility ; Eurozone

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