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Dollar shortage

Some banks here in Asia have hiked dollar deposit rates in a clandestine fashion. They need the currency to fund their balance sheets, but dollars seem to be less readily available in the interbank market than they used to be. Earlier this week, bank liquidity deteriorated to an extent we have not seen since the financial crisis. Basis swaps of the major currencies against the dollar have blown out of proportions. It has become painfully expensive to roll dollar liabilities with maturities of less than 3 months.

Foreign borrowers simply rely on the money markets to be able to roll this debt. In aggregate, they are on the hook to the tunes of in excess of 10 trillion dollars. Such gargantuan dependency that already almost tore the world apart in 2008 is now coinciding with a dwindling credit standing of banks in Japan and Europe caused by both the coronavirus and the collapse of pretty much all financial correlations ever since the crude market crashed and cut oil prices in half.
This perceived counterparty risk has caused American banks to either withdraw dollar liquidity from the rest of the world or lift the price for it. The other reason to repatriate liquidity is the trouble that is to be expected in the domestic economy, with the commercial paper market dysfunction being a testament to it. The mortgage market has become wobbly as defaults are to be expected. Mortgages have already decoupled from Treasuries, which is one of the de-correlation trades that has been unfolding before our eyes.
The result of all this is a pronounced strength of the greenback lately. Even gold seems to be sold off now to raise dollars. The currency shortage is leaving its mark, and no one can tell when this move will or can stop. To be sure, central banks under the leadership of the US are on the front foot. The Fed has already announced facilities for both the commercial paper and the mortgage market, and swap lines with other central banks were announced, for dollars to be lent to commercial banks in their jurisdictions.
Unfortunately, these measures have not exactly been doing the trick. The mortgage market is a monster, and it will take a lot to tame it. And to extend swap lines to safeguard a 10 trillion+ international liability portfolio isn’t a trivial matter either. We are talking about trillions here. At one point the question will have to be raised how much more the Fed and the US government can do, not to forget the EU and Japan and their respective central banks.
The US national debt has spiralled up to 23 trillion, no less due to Trump’s 1 trillion annual deficits at the time when the economy was humming. How much will the emergency packages add? Another trillion per year? More? Will US debt push 30 trillion by the time the health crisis is under control? In any case, the higher the numbers, the less confident the world will be about the US money system. But for now, the scramble for dollars will be on, until it isn’t…
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