Global exchange rate adjustments: drivers, impacts and policy implications

Key takeaways

• A sequence of major shocks to the global economy has led to substantial exchange rate adjustments, notably a strengthening of the US dollar against most currencies, reflecting cross-country  differences in shock exposure and in the pace of monetary tightening.
• Given the central role of the US dollar as an invoicing currency, a dollar appreciation tends to raise foreign import prices. Unlike in the past, recent dollar appreciation has coincided with a surge in commodity prices, compounding the impact on inflation. Dollar appreciation has also been associated with a tightening of global financial conditions.
• FX intervention may help mitigate dislocations arising from exchange rate swings, but is likely to be effective only if it is part of a consistent macroeconomic policy stance that ensures macro-financial stability. In particular, a coherent fiscal-monetary mix is essential to avoid disruptive exchange rate movements that may arise from fears of fiscal dominance.

The views expressed in this publication are those of the authors and not necessarily those of the BIS.