Did U.S. Conventional Monetary Policy affect Foreign Exchange Rates in a Conventional Way during the Pandemic?

Monetary policy has traditionally served as a critical signal influencing various market behaviors. However, the effectiveness of traditional monetary policy in the context of financial markets during times of crisis has been called into question. This study seeks to investigate this issue by analyzing exchange rate ETF data and federal funds futures data from 2020 to 2023. Specifically, it examines the association between US conventional monetary policy surprises and exchange rate movements during the COVID-19 pandemic. The results indicate that a 1% increase in the tightening policy rate shock correlates with a 0.0365% appreciation of the US dollar during the event window. This finding suggests that even amidst the economic uncertainties brought on by the COVID-19 pandemic, traditional monetary policy actions, such as interest rate changes, continue to play a significant role in influencing exchange rate dynamics. This has important implications for policymakers and market participants, as it underscores the persistent relevance of monetary policy in guiding market expectations and behaviors during periods of crisis.