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Foreign Safe Asset Demand and the Dollar Exchange Rate


  • Jiang, Zhengyang

    (Stanford University)

  • Krishnamurthy, Arvind

    (Stanford University)

  • Lustig, Hanno

    (Stanford University)


The convenience yield that foreign investors derive from holding U.S. Treasurys causes a failure of Covered Interest Rate Parity by driving a wedge between the yield on the foreign bonds and the currency-hedged yield on the U.S. Treasury bonds. Even before the 2007-2009 financial crisis, the Treasury-based dollar basis is negative and occasionally large. We use the Treasury basis as a measure of the foreign convenience yield. Consistent with the theory, an increase in the convenience yield that foreign investors impute to U.S. Treasurys coincides with an immediate appreciation of the dollar, but predicts future depreciation of the dollar. The Treasury basis variation accounts for up to 25% of the quarterly variation in the dollar between 1988 and 2017.

Suggested Citation

  • Jiang, Zhengyang & Krishnamurthy, Arvind & Lustig, Hanno, 2018. "Foreign Safe Asset Demand and the Dollar Exchange Rate," Research Papers 3621, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:3621

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    Cited by:

    1. Del Negro, Marco & Giannone, Domenico & Giannoni, Marc P. & Tambalotti, Andrea, 2019. "Global trends in interest rates," Journal of International Economics, Elsevier, vol. 118(C), pages 248-262.
    2. Glick, Reuven, 2020. "r* and the global economy," Journal of International Money and Finance, Elsevier, vol. 102(C).
    3. Georgios Georgiadis & Ben Schumann, 2019. "Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation," Globalization Institute Working Papers 368, Federal Reserve Bank of Dallas.
    4. Tobias Adrian & Peichu Xie, 2020. "The Non-U.S. Bank Demand for U.S. Dollar Assets," IMF Working Papers 20/101, International Monetary Fund.
    5. Franz, Thorsten, 2020. "Central bank information shocks and exchange rates," Discussion Papers 13/2020, Deutsche Bundesbank.
    6. Patrick Augustin & Mikhail Chernov & Lukas Schmid & Dongho Song, 2020. "A No-Arbitrage Perspective on Global Arbitrage Opportunities," NBER Working Papers 27231, National Bureau of Economic Research, Inc.
    7. Chernov, Mikhail & Creal, Drew, 2018. "Multihorizon Currency Returns and Purchasing Power Parity," CEPR Discussion Papers 12893, C.E.P.R. Discussion Papers.
    8. Charles Engel & Steve Pak Yeung Wu, 2018. "Liquidity and Exchange Rates: An Empirical Investigation," NBER Working Papers 25397, National Bureau of Economic Research, Inc.
    9. Engel, Charles, 2020. "Safe U.S. Assets and U.S. Capital Flows," Journal of International Money and Finance, Elsevier, vol. 102(C).
    10. Beetsma, Roel & de Jong, Frank & Giuliodori, Massimo & Hanson, Jesper, 2019. "The Maturity of Sovereign Debt Issuance in the Euro Area," CEPR Discussion Papers 13729, C.E.P.R. Discussion Papers.
    11. Charles W. Calomiris & Harry Mamaysky, 2019. "Monetary Policy and Exchange Rate Returns: Time-Varying Risk Regimes," NBER Working Papers 25714, National Bureau of Economic Research, Inc.

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