Dealer Leverage and Exchange Rates : Heterogeneity Across Intermediaries
We find that the leverage of primary dealers has predictive power in forecasting exchange rates. Importantly, we find that dealer heterogeneity matters and that the marginal participant in financial markets changes over time. The leverage of foreignheadquartered dealers in the U.S. drives the predictive power on exchange rates, while it is insignificant for U.S.-headquartered dealers. This heterogeneity is explained by the relative balance sheet capacity of foreign dealers compared to domestic dealers. Additionally, we document that currency market positions are stronger than cross-border lending as the channel through which leverage affects exchange rates