The dollar squeeze of the financial crisis

Jean-Marc Bottazzi, Jaime Luque, Mario Pascoa and Suresh Sundaresan

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: By Covered Interest rate Parity (CIP), the FX swap implied currrency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro- Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the “convenience yield” associated with that currency. This is similar to specialness in repo markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.

Keywords: FX; swaps; Repo; Euro-Dollar; currency; basis; The; 2008; dollar; squeeze; Possession (search for similar items in EconPapers)
JEL-codes: D52 D53 G12 G14 G15 G18 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cwa, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Dollar Squeeze of the Financial Crisis (2012)
Working Paper: The dollar squeeze of the financial crisis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we1139

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