Regarding the transmission channels, a QE shock that expands the ECB's balance sheet relative to that of the Federal Reserve works to a significant extent through the “signalling channel”. It persistently reduces the euro/dollar short-term money market rate differentials and shifts market expectations regarding the timing of a lift-off further into the future (Chart 7, right side).
The largest contribution, stems from the effects of QE on residual risk premia in foreign exchange markets, as is shown in Chart 8 (see the red bars). The substantial role of risk premia echoes the evidence from classic studies that a large share of the variation in the dollar exchange rate is attributable to this residual risk premium component.