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Foreign Safe Asset Demand and the Dollar Exchange Rate
Author(s) -
JIANG ZHENGYANG,
KRISHNAMURTHY ARVIND,
LUSTIG HANNO
Publication year - 2021
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13003
Subject(s) - liberian dollar , convenience yield , currency , treasury , monetary economics , depreciation (economics) , foreign exchange reserves , economics , asset (computer security) , valuation (finance) , yield (engineering) , reserve currency , exchange rate , special drawing rights , bond , business , financial economics , devaluation , finance , spot contract , microeconomics , materials science , computer security , history , futures contract , archaeology , computer science , profit (economics) , financial capital , metallurgy , capital formation
ABSTRACT 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 that impute a special role to the United States as the world's provider of safe assets and the dollar as the world's reserve currency.