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

Author

Listed:
  • Ryan Niladri Banerjee
  • Lena Boneva
  • Gabor Pinter
  • Vladyslav Sushko

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.

Suggested Citation

  • Ryan Niladri Banerjee & Lena Boneva & Gabor Pinter & Vladyslav Sushko, 2026. "Monetary policy transmission to exchange rates: the role of currency carry trades," BIS Bulletins 124, Bank for International Settlements.
    • Handle: RePEc:bis:bisblt:124
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    References listed on IDEAS

    as
    1. Rodrigo Guimaraes & Gabor Pinter & Jean-Charles Wijnandts, 2023. "The liquidity state-dependence of monetary policy transmission," Bank of England Staff Working Paper series 1045, Bank of England.
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    3. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347, National Bureau of Economic Research, Inc.
    4. Gürkaynak, Refet S. & Kara, A. Hakan & Kısacıkoğlu, Burçin & Lee, Sang Seok, 2021. "Monetary policy surprises and exchange rate behavior," Journal of International Economics, Elsevier, vol. 130(C).
    5. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
    6. Hutchison, Michael & Sushko, Vladyslav, 2013. "Impact of macro-economic surprises on carry trade activity," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1133-1147.
    7. Ryan Niladri Banerjee & Boris Hofmann & Ding Xuan Ng & Gabor Pinter, 2025. "The rise of non-bank financial institutions: implications for monetary policy," BIS Bulletins 116, Bank for International Settlements.
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