Global exchange rate adjustments: drivers, impacts and policy implications

Key takeaways

• A sequence of major shocks to the global economy has led to substantial exchange rate adjustments, notably a strengthening of the US dollar against most currencies, reflecting cross-country  differences in shock exposure and in the pace of monetary tightening.
• Given the central role of the US dollar as an invoicing currency, a dollar appreciation tends to raise foreign import prices. Unlike in the past, recent dollar appreciation has coincided with a surge in commodity prices, compounding the impact on inflation. Dollar appreciation has also been associated with a tightening of global financial conditions.
• FX intervention may help mitigate dislocations arising from exchange rate swings, but is likely to be effective only if it is part of a consistent macroeconomic policy stance that ensures macro-financial stability. In particular, a coherent fiscal-monetary mix is essential to avoid disruptive exchange rate movements that may arise from fears of fiscal dominance.