When the U.S. cuts interest rates, global investors chase riskier money

A new study co-authored by University of Alberta’s School of Business researcher Colin Ward shows that following an easing in U.S. monetary policy, investment funds sell safe currencies and buy risky ones. Global U.S. banks, similarly, tilt their distribution of foreign loan origination toward riskier currencies. The effects on currency flows and loans persist beyond several months and feed into the leverage and real investment decisions of firms, especially those that borrow in high-risk currencies.

The research, published in the Journal of Financial Economics, offers a simple way to understand how the Federal Reserve affects economies beyond the United States. The study concludes that a currency’s risk helps explain where international money flows after a change in monetary policy.

What happens when U.S. interest rates drop

When the Federal Reserve lowers interest rates, investors have less reason to keep money in U.S. dollars. The researchers wanted to know where that money goes and how a currency’s relative safety or riskiness affects its money flow.

The researchers found that investment funds (mutual, pension, and hedge funds) generally moved money from safer currencies, like the Japanese yen, into riskier currencies, like the Australian dollar, after an unexpected monetary easing.

“Our results support the risk-taking channel of monetary policy,” said Ward. “The Federal Reserve easing generates a “risk-on” signal that strengthens institution’s drive to take on risk. The flows we see arise from a risk-based story rather than one based on risk-free rates.”

Banks shift their lending

The study finds a similar pattern in international bank lending. The researchers examined syndicated loans — large loans provided by a group of lenders rather than a single bank — involving globally active U.S. banks.

Following an unexpected easing by the Federal Reserve, U.S. banks tilted their lending in foreign currencies away from safe currencies and towards risky currencies. This means a change in U.S. monetary policy affects more than currency prices. It also influences which countries and companies have easier access to international credit.

Effects on companies

The researchers then followed the lending decisions into the real economy. They linked international loans to financial statements for non-U.S. companies. Companies that borrowed in high-risk currencies were more likely to receive syndicated loans after the Federal Reserve eased rates. Firms exposed to higher-risk currencies increased borrowing, levered up, and invested more in tangible assets.

The researchers distinguished the company’s operating currency from their reporting currency, allowing them to compare companies in the same country that were exposed to different currencies. The results suggest that two companies operating under similar national economic conditions can experience different effects from a U.S. rate cut because of the currency in which they conduct business or borrow.

Persistent effects

The study found that flows out of lower-risk currencies remained statistically significant for about four months. In contrast, inflows into higher-risk currencies lasted beyond a year. Persistence matters because it connects a short-lived monetary policy surprise with longer-lasting changes in international financing and investment.

The study’s main conclusion is that currency risk is not merely a way to describe differences in investment returns. It also helps explain how U.S. monetary policy moves through global financial markets and affects foreign businesses.

Key takeaways

• Unexpected U.S. rate cuts encourage investment funds to shift from low-risk currencies, such as the Japanese yen, toward high-risk currencies, such as the Australian dollar. Globally-active U.S. banks respond in a similar way by tilting their foreign loan origination away from safe currencies and towards risky currencies.
• The currency-flow response lasts beyond several months. This connects the short-run monetary policy shock to persistent differences in the real economy.
• Companies operating and borrowing in higher-risk currencies receive relatively more credit after a U.S. easing and subsequently increase leverage and investment.

Read Ward’s full article in the Journal of Financial Economics at DOI:10.1016/j.jfineco.2026.104305