IMF Working Papers

We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. To empirically establish the relevance of survey-based expectations for currency flows, we leverage granular foreign exchange trading data and present three main findings. First, end-user investors increase their dollar purchases when they expect the US dollar to appreciate. Investment funds and non-dealer banks adjust their synthetic dollar borrowing in the FX swap market in response to forecasted changes in synthetic dollar funding costs. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, the predictive power of survey forecasts weakens when forecaster disagreement or uncertainty rises. Overall, our findings show that long-horizon expectations predict dollar demand across spot, forward, and swap currency markets.