what causes volatility in exchange rates 
according to the dornbusch overshoot model exchange rates are volatile because forex markets are highly sensitive to changes in monetary policy while goods prices are more slow to react as a result when monetary policy changes exchange rates will fluctuate until goods prices adjust to the new equilibrium the bottom linethe overshooting model was introduced by economist r diger dornbusch to explain why exchange rates tend to be so volatile this theory states that exchange rates will react strongly to changes in monetary policy until goods prices reach a new equilibrium 