The Dollar Squeeze of the Financial Crisis

Jean-Marc Bottazzi (), Jaime Luque (), Mário R. Páscoa () and Suresh Sundaresan ()
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Jean-Marc Bottazzi: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Jaime Luque: UC3M - Universidad Carlos III de Madrid [Madrid]
Mário R. Páscoa: NOVA SBE - NOVA - School of Business and Economics - NOVA - Universidade Nova de Lisboa = NOVA University Lisbon
Suresh Sundaresan: Columbia University [New York]

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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; taux de change; marches à terme; FX swaps; repo; Euro-Dollar currency basis; the 2008 dollar squeeze (search for similar items in EconPapers)
Date: 2012-02
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00673982v1
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Published in 2012

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