cal since the man who controls US interest rates has been quoted as saying the growth of in equity markets is the result of "irrational exuberance." With the interest rate in the US not being reflective of the expected return on capital it is possible that capital outflows are another factor pushing the exchange rate down. In addition to Canadian dollars being sold, such a situation would be further reinforced by the capital outflows from all other countries, which would push up the value of the US dollar. Although I have no direct evidence to support such a contention, it is a possibility worth exploring in the future.Another facet of irrationality and the exchange market is the behavior exhibited by investors who are not risk consistent. That is to say that investor have a tendency to alter their risk preference once the have lost a significant amount of money. The past decade has certainly not been lacking in its share of currency crises: Mexico in 1994, the Asian crisis in 1998, and the poor performance of the Euro. This may have caused investors to view the US dollar as the only safe heaven. If this is correct, then in true circular fashion the US dollar would appreciate against all other currency, which its seems to have done according to the chart below especially after 1996....
