Foreign Safe Asset Demand and the Dollar Exchange Rate

98 Pages Posted: 21 Mar 2018 Last revised: 21 Sep 2020

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance

Arvind Krishnamurthy

Stanford Graduate School of Business

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

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Date Written: March 19, 2018

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.

Keywords: Covered Interest Rate Parity, Exchange Rates, Safe Asset Demand, Convenience Yields

JEL Classification: F31

Suggested Citation

Jiang, Zhengyang and Krishnamurthy, Arvind and Lustig, Hanno N., Foreign Safe Asset Demand and the Dollar Exchange Rate (March 19, 2018). Stanford University Graduate School of Business Research Paper No. 18-16, Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3142280 or http://dx.doi.org/10.2139/ssrn.3142280

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

Arvind Krishnamurthy

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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