Accessible Version
Monetary Policy and Exchange Rates during the Global Tightening, Accessible Data
Figure 1. AFE Dollar Index
The AFE dollar index increased notably from early September of 2021 through end of March 2022, which was largely in line with what’s implied by OIS differentials shown separately in the figure. Over the course of the following six months, the AFE dollar index rose another 13 percent even as the path implied by OIS differentials moved little, on net, as monetary tightening became increasingly synchronous across major economies. At the same time, risk aversion in financial markets increased as investors assessed implications of Russian invasion of Ukraine and historically fast tightening by major central banks for global growth outlook. Consistent wit this, the path implied by the model that contains the high-yield spread and VIX index in addition to OIS differentials moved higher. The AFE dollar index retraced notably from its October 2022 peak as inflation came down and risk appetite in broader financial markets recovered. This retracement is largely in line with that implied by the model including broad risk indicators. Currently, AFE dollar is about 13 percent higher than its level in September 2021, when market-implied U.S. policy rates started to move up, and about half of this increase can be attributed to relatively higher interest rates in the U.S.