Monetary policy transmission to exchange rates: the role of currency carry trades

Ryan Niladri Banerjee, Lena Boneva, Gabor Pinter and Vladyslav Sushko

No 124, BIS Bulletins from Bank for International Settlements

Abstract: Carry trade activity can shape the exchange rate response to monetary policy. Significant short positions of carry traders in funding currencies amplify the impact of policy tightening. This amplification arises from the unwinding of leveraged carry trade positions accumulated prior to the policy announcement, creating a state-dependent monetary policy transmission to the exchange rate. The currency trading strategies of hedge funds and other leveraged investors can play a key role in shaping the exchange rate response to monetary policy and therefore warrant careful monitoring.

Pages: 8 pages
Date: 2026-05-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.bis.org/publ/bisbull124.pdf Full PDF document (application/pdf)
https://www.bis.org/publ/bisbull124.htm (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:bisblt:124

Access Statistics for this paper

More papers in BIS Bulletins from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().