The Dollar Ahead of FOMC Target Rate Changes
Charles A. Dice Working Paper No. 2018-14
51 Pages Posted: 27 Jul 2018 Last revised: 29 Jul 2018
Date Written: July 26, 2018
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: Suggested Citation