Hunting for Dollars

Peteris Kloks, Edouard Mattille and Angelo Ranaldo
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Peteris Kloks: University of St. Gallen
Edouard Mattille: University of St. Gallen

No 24-52, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Using novel granular data on the global flows of wholesale and synthetic dollar funding, we show that constrained non-US banks substitute dollar borrowing from US repo markets with foreign exchange (FX) swaps at the quarter-end. As wholesale borrowing is encumbered by shadow costs, non-US banks satisfy their inelastic dollar demand by obtaining synthetic funding, for which they are willing to pay a heightened cross currency basis. Eurozone banks in particular hunt for dollars by engaging in such repo-FX swap substitution, with the benefits largely accruing to US dealers. Our study explains the increase in synthetic dollar borrowing and deviations from covered interest rate parity (CIP) observed at the quarter-end and uncovers how global banks manage short-term dollar liquidity across multiple money markets.

Keywords: US Dollar; Global Banks; FX Swaps; Repos; Intermediary Constraints; Covered Interest Parity; Regulation (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2024-09
New Economics Papers: this item is included in nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2452

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