Foreign Safe Asset Demand and the Dollar Exchange Rate

Zhengyang Jiang, Arvind Krishnamurthy and Hanno Lustig

No 24439, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theory that links the U.S. dollar’s valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience yield can be inferred from the Treasury basis: the yield gap between U.S. government and currency-hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models which impute a special role to the U.S. as the world’s provider of safe assets and the dollar, the world’s reserve currency.

JEL-codes: G15 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-ifn and nep-mon
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Citations: View citations in EconPapers (41)

Published as Zhengyang Jiang & Arvind Krishnamurthy & Hanno Lustig, 2021. "Foreign Safe Asset Demand and the Dollar Exchange Rate," Journal of Finance, American Finance Association, vol. 76(3), pages 1049-1089, June.

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Related works:
Journal Article: Foreign Safe Asset Demand and the Dollar Exchange Rate (2021)
Working Paper: Foreign Safe Asset Demand and the Dollar Exchange Rate (2019)
Working Paper: Foreign Safe Asset Demand and the Dollar Exchange Rate (2018)
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