Jun. Prof. Benedikt Ballensiefen (Köln)

Demand for Dollars: Evidence from Survey Expectations (joint with Fabricius Somogyi and Hannah Winterberg)

We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. Leveraging granular foreign exchange (FX) trading data and forward looking expectations, we present three results. First, currency investors increase their dollar holdings when expecting US dollar appreciation or improved US macroeconomic fundamentals, whereas synthetic dollar funding is driven by forecasted deviations from covered interest parity. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, the predictive power of professional forecasts weakens when uncertainty or forecaster disagreement rises. Our findings demonstrate that long-horizon expectations accurately predict dollar demand across spot, swap, and forward currency markets. To rationalise these empirical findings, we develop a model of currency demand.