US Fiscal Cycle and the Dollar, Journal of Monetary Economics
When the US fiscal condition is strong, the dollar is strong, has a high forward discount, and continues to appreciate in the next 2 years. I propose a framework to decompose the dollar's real exchange rate, and show these patterns imply that a stronger fiscal condition lowers the US investors' short-run risk premium but raises their long-run risk premium. This comovement is supported by evidence from the term structure of stock risk premia, bond risk premia, and cross-border capital flows. It highlights the US fiscal cycle as the key state variable for understanding the dollar and the US investors' risk premium.
Jiang, Zhengyang. 2021. US Fiscal Cycle and the Dollar. Journal of Monetary Economics.LINK