Global Dollar Exposure and Its Relationship with CIP Deviations

IMF Working Papers, August 14, 2026

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This paper analyzes a global map of dollar exposures and examines the relationship between net dollar exposures, defined as the difference between dollar assets and liabilities, and covered interest parity (CIP) deviations.
CIP deviations represent the hedging cost that foreign holders of dollar assets or liabilities incur to manage exchange rate risk.
Cross-sectional relationship findings:
- Significantly negative in advanced economies.
- Positive in emerging markets.

Advanced economies:
- The cross-sectional relationship between net dollar exposures and CIP deviations is significantly negative.
- Interpretation: Larger net dollar exposures increase hedging demand, raising hedging costs (reflected as more negative CIP deviations), producing a negative correlation.
Emerging markets:
- The cross-sectional relationship between net dollar exposures and CIP deviations is positive.
- Interpretation: Limited hedging supply leads to wider CIP deviations (more negative), encouraging firms to borrow in U.S. dollars rather than local currencies, thereby reducing net dollar exposures and generating a positive correlation.

Model structure:
- CIP deviations are determined by the demand and the supply side of hedging.
Demand-side mechanism (explains advanced economies):
- Variations in hedging demand dominate.
- Higher net dollar exposures → higher hedging demand → higher hedging costs → more negative CIP deviations → negative correlation.
Supply-side mechanism (explains emerging markets):
- Limited hedging supply dominates.
- Limited supply → wider CIP deviations (more negative) → firms prefer borrowing in U.S. dollars → net dollar exposures fall → positive correlation.

Subject: Currencies, Emerging and frontier financial markets, Exchange rate risk, Financial markets, Financial regulation and supervision, Financial services, Hedging, Interest rate parity, Money
Keywords: Africa, banks and non-banks, cip deviation, covered interest parity, Currencies, Dollar assets, dollar exposure, dollar liabilities, Emerging and frontier financial markets, Exchange rate risk, Global, Hedging, hedging demand, hedging market, hedging supply, IMF working papers, Interest rate parity