Tracking a Decade-Long Appreciation of the US Dollar

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The US dollar appreciated by 23 percent against a broad basket of other currencies between January 2011 and December 2019, and has continued its appreciation since then. In Understanding the Strength of the Dollar (NBER Working Paper 30558), Zhengyang Jiang, Robert J. Richmond, and Tony Zhang analyze factors that contributed to the dollar’s rise. They estimate that global growth in investor savings accounted for appreciation of 8.7 percent, relatively tight US central bank monetary policy 5.8 percent, and shifting investor demand toward US assets 9.3 percent. Slowing of dollar reserve accumulation by other countries’ central banks after the 2008 financial crisis was a net negative for the dollar and would have reduced the dollar’s value by 1.3 percent in the absence of other factors.


To quantify how much each macro factor contributed to dollar appreciation, the researchers analyze a demand system for cross-border portfolio holdings using granular data from 32 countries. It maps changes in macroeconomic variables such as investor savings or asset fundamentals to shifts in asset demand and supply, and traces out how exchange rates move to clear international financial markets.

Rising global savings, higher US policy rates, and shifts in investor preferences boosted demand for dollar-denominated assets and contributed to the dollar’s rise over the 2011–19 period.

The analysis relies upon three types of data: cross-country portfolio holdings, country/asset characteristics, and the realized returns in each asset class by country or country group. Data are drawn from a variety of sources, such as the International Monetary Fund’s Coordinated Portfolio Investment Survey, the US Treasury International Capital System, the World Bank and the Bank for International Settlements. At each stage of the data construction, the researchers select the data that provide the most accurate representation of cross-border portfolio holdings and asset returns.

The findings suggest that the dollar may continue to strengthen as the Federal Reserve continues rate hikes, as global savers continue to search for safe harbors, and as US fundamentals remain relatively strong. For countries other than the US that are seeking to strengthen their exchange rates, higher rates and stronger economic fundamentals help. The dollar has the advantage, however, of being the default currency for rising global savings.

The researchers note that demand for dollar assets is quite stable. In the counterfactual scenario of one major foreign country selling all of its holdings of US assets, they find that other foreign buyers would purchase these assets at a very slight discount. This implies that, absent a coordinated global run, significant dollar depreciation is unlikely.

—Linda Gorman