Gimme Shelter: The U.S. Dollar Trade And Its Risks

April 23, 2015


1. For an overview of the literature and most recent findings, see Lustig et al. (2011) and Koijen et al. (2013).

2. The common variation of foreign currencies against the U.S. dollar explains about three-fourths of the returns earned by U.S. dollar-based investors with broad exposure to international currencies. Lustig et al. (2011), p. 13.

3. In a momentum strategy, investors buy currencies that have appreciated in the previous few months and sell the currencies that have lost in value.

4. The minutes from the FOMC meeting of March 18 show that some members of the rate-setting committee are in favor of delaying the first increase of the target rate to later this year or even early 2016.

5. The absolute version of the PPP theory predicts that the price of a basket of goods expressed in a common currency should be equalized across different countries (i.e., the real exchange rate should be unity). A weaker form of PPP predicts that real exchange rates should remain constant. Nominal exchange rates are much more volatile than the prices of goods, and we actually observe deviations from PPP predictions. Because these deviations tend to be corrected over medium and long horizons, they form the basis for value strategies in currency markets.


Koijen, Ralph S.J., Tobias J. Moskowitz, Lasse Heje Pedersen, and Evert B. Vrugt. 2013. "Carry." NBER Working Paper No. 19325.

Lustig, Hanno, Nikolai Roussanov, and Adrien Verdelhan. 2011. "Common Risk Factors in Currency Markets." Review of Financial Studies, vol. 24, no. 11 (November):3731–3777.

———. 2014. "Countercyclical Currency Risk Premia." Journal of Financial Economics, vol. 111, no. 3 (March):527–553.

Meese, Richard, and Kenneth Rogoff. 1983. "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?" In Jacob A. Frenkel, ed., Exchange Rates and International Macroeconomics (NBER Research Conference Report). Chicago, IL: University of Chicago Press.

Ramage, James. 2015. "Dollar's Strengthening Likely Isn't Over." Wall Street Journal (March 31).

Ross, Stephen A. 1976. "The Arbitrage Theory of Capital Asset Pricing." Journal of Economic Theory, vol. 13, no. 3 (December):341–360.

Shepherd, Shane. 2015. "Not-So-Great Expectations: Why Real Interest Rates Won't Soar." Research Affiliates (April).



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