The Dollar Ahead of FOMC Target Rate Changes
Charles A. Dice Working Paper No. 2018-14
51 Pages Posted: 27 Jul 2018 Last revised: 26 Feb 2020
Date Written: January 31, 2020
I find that the U.S. dollar appreciates before contractionary monetary policy decisions at scheduled Federal Open Market Committee meetings and depreciates before expansionary decisions. The federal funds futures rate forecasts these dollar movements with a 22% R2. A high federal funds futures spread three days in advance of an FOMC meeting not only predicts the target rate rise, but also predicts a rise in the dollar over the subsequent two-day period. This predictability is concentrated in times of high FX volatility, as the FX traders avoid arbitrage risk earlier than a few days prior to the announcement.
Keywords: exchange rates, monetary policy, federal funds futures, predictability
JEL Classification: F31, G12, G17, E52
Suggested Citation: Suggested Citation