Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/305469 
Year of Publication: 
2024
Series/Report no.: 
Working Papers No. 24-11
Publisher: 
Federal Reserve Bank of Boston, Boston, MA
Abstract: 
We leverage supervisory microdata to uncover the role of global banks' risk limits in driving exchange rate dynamics. Consistent with a model of currency intermediation under risk constraints, shocks to dealers' risk limits lead to price and quantity adjustments in the foreign exchange market. We show that dealers adjust their net position and increase the bid-ask spread in response to granularly identified limit shocks, leading to lower turnover and an adjustment in currency returns. These shocks exacerbate the effects of net currency demand on exchange rate movements, as predicted by theory, and trigger deviations from covered interest parity.
Subjects: 
Exchange rates
currency returns
market making
risk constraints
financial intermediation
JEL: 
F31
G15
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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