Currency appreciation goes hand in hand with easier financial conditions and compressed sovereign bond spreads, even for local currency sovereign bonds. This yield compression comes from a reduction in the credit risk premium. Crucially, the relevant exchange rate involved in yield compression is the bilateral dollar exchange rate, not the trade-weighted exchange rate. Our findings point to a financial risk-taking channel of currency appreciation associated with the global role of the dollar.
The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.
