In swaps we trust? Disappearing dollars drive currency trading dependence

LONDON - As dollars dry up, global finance is growing increasingly dependent on opaque currency trading to keep cash flowing.

“It affected us in the FX swaps market a great deal. There was a lot of panic around, spreads widening, increased volatility,” said James Topham, a forex forwards trader at Canadian bank BMO, adding that on Sept. 16 “unusually large and persistent” dollar borrowing was evident from clients. Many central bankers say bank borrowing and funding via swaps, which are typically used for hedging, day-to-day liquidity management or even speculation, is driving the increase in FX swaps as they are “off-balance sheet”.

Borrowing via swaps could amount to $14 trillion or more, Claudio Borio, head of the BIS monetary and economic department estimated. Because dollar demand is so high, lenders ask for a price premium known as the cross-currency basis, which tends to become more negative as dollar shortages deepen. “We have dollar liquidity that partly depends on forex swap market, as we don’t have dollar deposits. But we regularly test the ability of the ECB to provide us with dollar liquidity via forex swaps. We don’t have any problems with that, this is not a concern,” a French banking executive said.

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