Global exchange rate adjustments: drivers, impacts and policy implications

The world economy has been hit by two major shocks in succession – the Covid-19 pandemic and the Russian invasion of Ukraine – which have contributed to a significant rise in inflation and a global economic slowdown. These global shocks and the monetary policy responses to contain inflation have been associated with large exchange rate adjustments. In particular, the broad US dollar index has appreciated by around 10% since the beginning of this year, reaching its highest level in almost four decades (Graph 1, left-hand panel). The US dollar’s appreciation has been broad-based against almost all major global currencies, with only a few exceptions (right-hand panel).While exchange rate movements are an integral part of economies’ adjustment to shocks and their asymmetric repercussions, the dollar’s role as the premier international currency in global trade and finance implies that its movements have significant macro-financial consequences. This Bulletin discusses the drivers of recent exchange rate adjustments, the economic impacts and the policy implications.