Should-Read: Matteo Maggiori, Brent Neiman, and Jesse Schreger: International Currencies and Capital Allocation: “The external wealth of countries has increased dramatically over the last forty years…

…Much is still unknown about trillions of dollars of capital allocated across the globe. Using a novel security-level dataset covering more than $27 trillion of global securities portfolios we find that the structure of global portfolios is driven, at both the macro and micro level, by an often neglected aspect: the currency of denomination of the assets. If a bond is denominated in the currency of one particular country, then investors based in that country tend to own the vast majority of that bond. This implies that the much-studied home bias in bonds is instead mostly currency bias.

Foreigners’ portfolios are very different from domestic portfolios: foreigners only finance a subset of domestic firms, those that issue bonds in the foreigners’ currency. The dollar and the euro are exceptions to this pattern, with companies in the US and EMU uniquely able to place local currency bonds in foreign portfolios. We uncover a large and pervasive shift in the use of these international currencies starting around the 2008 financial crisis. Cross-border portfolio holdings have starkly shifted away from euro-denominated bonds and toward dollar-denominated bonds…