The effects arising from the close interplay of monetary policy and exchange rate policy are not uniformly felt across the world’s economies. For the Fed, which enjoys the privilege of issuing the reserve currency, those effects are muted. Not so, however, for other Central Banks, such as the BOE, who must wrestle with the vagaries of exchange rate pass-through and the uncertainty which that can bring.
The ‘great divergence’ in monetary policy between the US and UK on one side and the Eurozone and Japan on the other brings with it another great divergence: in exchange rates. Expectations of higher interest rates in the US have pushed up the USD against the EUR by over an eighth in the last twelve months alone. The trade-weighted exchange rate of GBP is up by a tenth....
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