Research Details

Abstract

We present theory showing that the spot dollar exchange rate reflects the value of all future convenience yields that foreign investors assign to US Treasuries. The convenience yield also creates wedge, the Treasury-based dollar basis, between the yield on foreign bonds and the currency-hedged yield on US Treasury bonds. We use the Treasury basis to measure the foreign convenience yield and show that an increase in the basis coincides with an appreciation of the dollar, consistent with the theory. The variation in the Treasury basis accounts for 25 percent of the quarterly variation in the dollar between 1988 and 2017.

Type

Article

Author(s)

Zhengyang Jiang, Arvind Krishnamurthy, Hanno Lustig

Date Published

2018

Citations

Jiang, Zhengyang, Arvind Krishnamurthy, and Hanno Lustig. 2018. Foreign Safe Asset Demand for U.S. Treasurys and the Dollar. AEA Papers and Proceedings.: 537-541.