These financial spillovers work partly through the exchange rate. In particular, monetary policy tightening in the United States is seen as exporting inflation through the exchange rate and driving further tightening elsewhere.
It is notable that this market reaction reflects the expectation that central banks are reacting to the short-term effects of exchange rates on inflation, since the empirical evidence suggests that these short-term effects are outweighed over time by the disinflationary spillovers of the Federal Reserve’s tightening. 25.