Foreign Safe Asset Demand and the Dollar Exchange Rate

98 Pages Posted: 26 Mar 2018

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Date Written: March 2018


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.

Suggested Citation

Jiang, Zhengyang and Krishnamurthy, Arvind and Lustig, Hanno, Foreign Safe Asset Demand and the Dollar Exchange Rate (March 2018). NBER Working Paper No. w24439, Available at SSRN:

Zhengyang Jiang (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://

Arvind Krishnamurthy

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hanno Lustig

Stanford University

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