Understanding the Strength of the Dollar

72 Pages Posted: 22 Sep 2022 Last revised: 6 May 2024

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Robert Richmond

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Tony Zhang

Board of Governors of the Federal Reserve System

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Date Written: September 5, 2022

Abstract

We attribute variation in the strength of the U.S. dollar and its covariance with other major currencies to economic primitives using a demand system for global portfolio holdings. We take global investor savings, asset supply, and monetary policy as exogenous primitives, and show how these variables explain dollar exchange rate behavior. Prior to the global financial crisis, global savings and demand shifts explain dollar depreciation, whereas they explain dollar appreciation afterwards. Interest rates and cross-border bank loans explain short-term fluctuations in the dollar, but decline in significance over longer horizons. When explaining the dollar factor structure, we find that global savings drive common variations across foreign currencies, whereas investor demand shifts explain cross-sectional heterogeneity in dollar betas.

Keywords: Dollar, Exchange Rate, Capital Flows, Asset Demand System

Suggested Citation

Jiang, Zhengyang and Richmond, Robert and Zhang, Tony, Understanding the Strength of the Dollar (September 5, 2022). Available at SSRN: https://ssrn.com/abstract=4210797 or http://dx.doi.org/10.2139/ssrn.4210797

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Robert Richmond (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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United States

National Bureau of Economic Research (NBER) ( email )

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Tony Zhang

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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