The Impact of Continuously Rising of Fed's Policy Rate on US Dollar Exchange Rate Movement
Every time the Fed raises policy interest rates,it creates a huge disruption in the global economy and draws global attention.This is especially true for the new Fed rate hike cycle that began in 2022.With the sample of G20 countries,we establish a country-specific panel database.Firstly,we take the change of two-year U.S.Treasury rate during the two-day window of the adjustment of the Fed's policy in-terest rate as a proxy for the U.S.policy interest rate shock to analyze its daily impact on the U.S.dollar exchange rate under the global rate hike.We separate the change of the dollar exchange rate based on interest rate parity,purchasing rate parity and the real exchange rate conditions to analyze the impact mechanism of the Fed's and other countries'policy rate adjustments on the dollar exchange rate.In particular,we apply the local projection method to identify the exogenous shocks of monetary policy in the U.S.and other countries,and study the impact of the successive adjustment of U.S.and other countries'policy interest rates on the exchange rate of the U.S.dollar.We also compare the Fed's interest rate adjustment in 2022 on the exchange rate with the situation back in 2015.We find that one percent raise of the Fed policy rate hike in 2022 led to a significant appreciation of the dollar against the currencies of both developing and devel-oped countries(appreciate by 1.401%and 4.073%respectively),but the dollar went through a significant depreciation of the currencies of developing countries after the Fed rate hike in 2015(depreciate by 15.46%).The dollar appreciation effect of the Fed's interest rate hike was enhanced in 2022 with simultaneous policy rates increase of other G20 countries.Monthly data analysis suggests that the underly-ing reason for the depreciation of other countries'currencies against the dollar is that their prices have risen more than those of the United States.