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  Forex Articles & Studies
                           Exchange Rates and Monetary Policy Uncertainty
 Authors: Philippe Mueller. Warwick Business School
               Alireza Tahbaz-Salehi. Northwestern University - Kellogg School of Management
               Andrea Vedolin. Boston University - Department of Finance & Economics
                                         Date: June 2016

We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-a-vis the U.S.; (ii) increase with uncertainty about monetary ` policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

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