Demand for dollars: Evidence from survey expectations

We study the determinants of US dollar demand across market participants and traded in struments using survey-based exchange rate and macroeconomic expectations. Leveraging granular foreign exchange trading data, we show that forward-looking expectations accu rately predict both currency returns and flows. Specifically, we show that the predictability of currency returns at long-horizons can be attributed to price pressure that originates from investors whose trading activity is aligned with survey expectations. To empirically establish the relevance of survey-based expectations for currency flows, we present three results: First, end-user investors increase their dollar holdings when they expect the US dollar to appreciate, whereas dealer banks supply dollar liquidity. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into the US dollar following an expected dollar appreciation. Third, the predictive power of survey forecasts weakens when uncertainty or forecaster disagreement rises. Overall, our findings demonstrate that long-horizon expecta tions accurately predict dollar demand across spot, swap, and forward currency markets. To rationalise these empirical findings, we develop a model of currency demand.