Dollar Appreciation in 2008: Safe Haven, Carry Trades, Dollar Shortage and Overhedging

9 Pages Posted: 7 Aug 2012

See all articles by Robert N. McCauley

Robert N. McCauley

Bank for International Settlements (BIS)

Patrick McGuire

Bank for International Settlements (BIS)

Abstract

This feature argues that a combination of factors caused the surprising US dollar appreciation in the second half of 2008. Both the global flight to safety into US Treasury bills and the reversal of carry trades amidst the crisis were sources of dollar strength. In addition, the surge in dollar funding costs in the interbank and FX swap markets provided price incentives for corporates to draw on non-dollar funding to pay down existing dollar debt. Finally, dollar asset writedowns left European banks and institutional investors outside the United States with overhedged dollar books. The squaring of their positions, which required dollar purchases, also boosted the currency.

JEL Classification: F3, G2

Suggested Citation

McCauley, Robert N. and McGuire, Patrick M., Dollar Appreciation in 2008: Safe Haven, Carry Trades, Dollar Shortage and Overhedging. BIS Quarterly Review December 2009. Available at SSRN: https://ssrn.com/abstract=1519814

Robert N. McCauley

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Patrick M. McGuire (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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