What moves exchange rates?

Liquidity and exchange rates

Engel and Wu use a standard New Keynesian model but augmented with a role for liquidity returns on government bonds, and find that the “standard” determinants of exchange rate movements are statistically and quantitatively important after controlling for the liquidity yields. In particular they find that for the G10 currencies the relative liquidity yield (the home country yield relative to foreign country yields) has significant explanatory power for exchange rate movements.

Liquidity and Exchange Rates: An Empirical Investigation
Authors: Charles Engel, Steve Pak Yeung Wu
From: University of Wisconsin

US Treasuries and the dollar

Jiang and al. confirm the Engel and Wu findings for the US dollar:

[We] find that a widening of the U.S. Treasury basis coincides with an immediate appreciation and a subsequent depreciation of the U.S. dollar. The Treasury basis accounts for up to 28% of the quarterly variation in the dollar.

Foreign Safe Asset Demand and the Dollar Exchange Rate
Authors: Zhengyang Jiang, Hanno Lustig, Arvind Krishnamurthy,
From: Northwestern University, Stanford University

The US monetary policy and the dollar

Stavrakeva and Tang find that it was the US monetary policy easings during the Great Recession that caused the dollar to appreciate and led to a significant transfer of wealth from the United States to the rest of the world. The appreciation, which was counter to standard macroeconomics, was due to two factors: a) flight-to-safety; b) expectations for lower US inflation.

The Dollar During the Global Recession: US Monetary Policy and the Exorbitant Duty
Authors: Vania Stavrakeva, Jenny Tang
From: London Business School, Federal Reserve Bank of Boston