In this paper, we argue that the eﬀect of monetary and ﬁscal policies on the exchange rate depends on the ﬁscal regime. A contractionary monetary (expansionary ﬁscal) shock can lead to a depreciation, rather than an appreciation, of the domestic currency if debt is not backed by future ﬁscal surpluses. We look at daily movements of the Brazilian real around policy announcements and ﬁnd strong support for the existence of two regimes with opposite signs. The unconventional response of the exchange rate occurs when ﬁscal fundamentals are deteriorating and markets' concern about debt sustainability is rising. To rationalize these ﬁndings, we propose a model of sovereign default in which foreign investors are subject to higher haircuts and ﬁscal policy shifts between Ricardian and non-Ricardian regimes. In the latter, sovereign default risk drives the currency risk premium and aﬀects how the exchange rate reacts to policy shocks.