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The Dollar Squeeze of the Financial Crisis

Jean-Marc Bottazzi, Jaime Luque (), Mario Pascoa and Suresh Sundaresan ()
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Jaime Luque: UC3M - Universidad Carlos III de Madrid [Madrid]
Suresh Sundaresan: Columbia University [New York]

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: By Covered Interest rate Parity (CIP), the FX swap implied currency 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 repro markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.

Keywords: possession; the 2008 dollar squeeze; FX swaps; repo; Euro-Dollar currency basis; marches à terme; taux de change (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-ifn and nep-mon
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Published in 2012

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Working Paper: The dollar squeeze of the financial crisis (2012) Downloads
Working Paper: The dollar squeeze of the financial crisis (2011) Downloads
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