The effect of target federal funds rate changes on the foreign exchange markets : an event study approach

This paper examines the effect of target Federal funds rate changes on major five foreign exchange markets: Canada, Australia, Euro, Japan and the UK during the period from 2000 to 2007. Two different approaches of Rai, Seth and Mohanty (2007) and the event study of Brown and Warner (1980, 1985) are used in our paper. The results show that event-study method yields a stronger relationship between the U.S. Federal funds rate and exchange rates. On average, evidences are consistent with our expectations: federal funds rate increases (decreases) are associated with the U.S. dollar appreciation (depreciation). For cross-sectional analysis of individual exchange rates, cumulated abnormal returns suggest that yen is the only currency strongly affected by target Federal funds rate changes. -- federal funds rate ; event study ; federal funds futures