TY  - JOUR
AU  - Jiang, Zhengyang
AU  - Krishnamurthy, Arvind
AU  - Lustig, Hanno
TI  - Foreign Safe Asset Demand and the Dollar Exchange Rate
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 24439
PY  - 2018
Y2  - March 2018
DO  - 10.3386/w24439
UR  - http://www.nber.org/papers/w24439
L1  - http://www.nber.org/papers/w24439.pdf
N1  - Author contact info:
Zhengyang Jiang
Kellogg School of Management
Northwestern University
2211 Campus Drive
Evanston, IL 60610
E-Mail: zhengyang.jiang@kellogg.northwestern.edu

Arvind Krishnamurthy
Stanford Graduate School of Business
Stanford University
655 Knight Way
Stanford, CA 94305
E-Mail: akris@stanford.edu

Hanno Lustig
Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305
E-Mail: hlustig@stanford.edu
AB  - 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 which impute a special role to the U.S. as the world’s provider of safe assets and the dollar, the world’s reserve currency.
ER  -