Understanding the Strength of the Dollar
We link the sustained appreciation of the U.S. dollar from 2011 to 2019 to international capital flows driven by primitive economic factors. We show that increases in foreign investors’ net savings, increases in U.S. monetary policy rates relative to the rest of the world, and shifts in investor demand for U.S. financial assets contributed approximately equally to the dollar’s appreciation. We then quantify the impact of potential future demand shifts for U.S. assets on the value of the dollar.
For comments and discussions we would like to thank Ralph Koijen and Alexi Savov. CodyWan provided excellent research assistance. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System or the National Bureau of Economic Research.
- The US dollar appreciated by 23 percent against a broad basket of other currencies between January 2011 and December 2019, and has...