Monetary policy's rising FX impact in the era of ultra-low rates

BIS Working Papers No 626
April 2017

We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.

JEL classification: E52, E58, F31

Keywords: Rates, Unconventional Monetary Policy, Forward Guidance, Event Study, High Frequency Data