NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Zhengyang Jiang

Kellogg School of Management
Northwestern University
2211 Campus Drive
Evanston, IL 60610

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Institutional Affiliation: Northwestern University

NBER Working Papers and Publications

March 2018Foreign Safe Asset Demand and the Dollar Exchange Rate
with Arvind Krishnamurthy, Hanno Lustig: w24439
We develop a theory that links the U.S. dollar's valuation in FX markets to foreign investors' demand for U.S. safe assets. When the convenience yield that foreign investors derive from holding U.S. safe assets increases, the U.S. dollar immediately appreciates, thus lowering the foreign investors' expected future return from owning U.S. safe assets. The foreign investors' convenience yield can be inferred from the wedge between the yield on safe U.S. Treasury bonds and currency-hedged foreign government bonds, which we call the U.S. Treasury basis. Consistent with the theory, we find that a widening of the U.S. Treasury basis coincides with an immediate appreciation and a subsequent depreciation of the U.S. dollar. Shocks to news about current and future convenience yields accounts for 54...
 
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