The Dollar Ahead of FOMC Target Rate Changes

51 Pages Posted: 27 Jul 2018 Last revised: 29 Jul 2018

See all articles by Nina Karnaukh

Nina Karnaukh

Ohio State University; Fisher College of Business - Department of Finance

Date Written: July 26, 2018

Abstract

I find that the U.S. dollar appreciates over the two-day period before contractionary monetary policy decisions at scheduled Federal Open Market Committee (FOMC) meetings and depreciates over the two-day period before expansionary monetary policy 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. A simple trading strategy, which exploits this predictability, exhibits a 0.93 Sharpe ratio. My findings imply that information about monetary policy changes is reflected first in the fixed income markets, and only later becomes reflected in currency markets.

Keywords: exchange rates, monetary policy, federal funds futures, predictability

JEL Classification: F31, G12, G17, E52

Suggested Citation

Karnaukh, Nina, The Dollar Ahead of FOMC Target Rate Changes (July 26, 2018). Charles A. Dice Working Paper No. 2018-14; 31st Australasian Finance and Banking Conference 2018. Available at SSRN: https://ssrn.com/abstract=3221318 or http://dx.doi.org/10.2139/ssrn.3221318

Nina Karnaukh (Contact Author)

Ohio State University; Fisher College of Business - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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