Working Paper: NBER ID: w24439
Authors: Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
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 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.
Keywords: Foreign safe assets; Dollar exchange rate; Convenience yield; Treasury basis
JEL Codes: G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| widening treasury basis (E43) | immediate dollar appreciation (F31) |
| widening treasury basis (E43) | future dollar depreciation (F31) |
| foreign demand for US safe assets (G15) | dollar exchange rate (F31) |
| convenience yield from US treasury bonds (E43) | dollar valuation (F31) |
| treasury basis (E43) | changes in dollar value (F31) |