COLUMN-Inflated dollar aggravates global liquidity crunch: Mike Dolan

Band Mike Dolan

LONDON, April 22 (Reuters)A rising dollar turns the screw.

Borrowing rates are soaring across the planet as the world’s major central banks, spooked by a dramatic return to inflation, begin reversing super-easy pandemic policies by raising interest rates and recalling loan purchases. ‘obligations.

The global pool of liquidity that has helped sustain the world through COVID-19 is running low. Global financial conditions, as measured by Goldman Sachs, are the tightest since the 2008 banking crash.

And the US dollar’s prominent role in global finance and borrowing means the Federal Reserve’s rapid conversion to the need for a credit crunch is making the problem worse around the world – eclipsing other central banks with hikes. aggressive rates and further increasing the dollar exchange rate.

After already kicking off its rate hike cycle with a quarter-point hike last month, the Fed is now gearing up to tackle 40-year-high inflation rates with one of the toughest policy cuts. most brutal over a year since the 1960s.

The most visible sign of that is a return this week to positive territory for real 10-year, or inflation-adjusted, yields for the first time since the pandemic hit.

Financial markets are pricing a meteoric rise in key Fed rates to 3.5% by the middle of next year from just a quarter point now – and, surprisingly, not seeing rates of the 3-month dollar return below 3% for the rest of the decade.

Moreover, the Fed is simultaneously prepared to allow its bloated $9 trillion balance sheet to run out in a process called “quantitative tightening” – directly siphoning off the pool of cash actually stored in commercial bank reserves.

Unlike its peers, the Fed’s overdrive policy and its relative aggressiveness boosted the dollar.

The greenback hit 20-year highs against the Japanese yen this week as the Bank of Japan doubled down on its dovish stance

It also hit 6-month highs against the Chinese yuan as the People’s Bank of China seeks to offset the effects of lingering COVID lockdowns and jitters in the real estate sector by reversing the trend and easing again – wiping out a yield premium on Chinese 10-year bonds over US equivalents for the first time in 12 years.

And while the European Central Bank is also expected to raise interest rates this year, even the most hawkish prices only have policy rates rising by less than a third of the Fed’s planned decision in over the next 12 months. Moreover, the Eurozone’s greater vulnerability to energy shocks stemming from Russia’s invasion of Ukraine means that even this low price is suspect and the Euro is hovering near two-year lows.

Overall, the Fed’s broad dollar index has appreciated almost 5% since the start of last year and the “real” index is up almost 8%.


While a rising dollar is clearly a strain on foreign dollar borrowers, as well as those needing to finance dollar commodity purchases or trade financing, its impact can also be seen in the impact abrupt on aggregate measures of dollar-denominated liquidity.

CrossBorder Capital, liquidity specialist Michael Howell, estimates that liquidity provided by major central banks jumped another $159 billion in March to $29.6 trillion, up about $7 trillion from before. the pandemic.

But it is the changing pace of liquidity supply rather than absolute levels that is most watched by markets and these measures peaked well over a year ago.

In local currency terms, there have been signs of stabilization this month in the 3-month annualized change – gaining more than 2% in each of the past two weeks.

But that masks the impact of the rising dollar. In dollar terms, CrossBorder showed that the ebb of global central bank liquidity was actually accelerating and fell nearly 10% on this annualized measure last week, down from 6% the previous week and 3% before. .

Guessing the direction of the dollar from here is of course a much trickier prospect. Some argue that an aggressive Fed is already largely ignored and that all “surprises” now fall to other central banks. But others think the Fed’s comparative crisis will be unprecedented and not yet fully understood.

Turning to equities, there has been some hope that the strength of post-pandemic recoveries in the US and Europe will mean that outright recession will be averted despite the coming cash drain and bonds will take all the heat instead.

But that may be wishful thinking.

Attempting to explain why stock markets have been relatively flat this month in the face of all this hawkishness, Citi global strategist Matt King concluded, “The reality is that the tightening hasn’t even started yet.”

The author is Finance and Markets Editor at Reuters News. All opinions expressed here are his own.

Relative Real Yields and the US Dollar

Global central bank balance sheets

Broad dollar indices and real returns

Disappearance of the yield premium in China and decline of the yuan

Econ Surprise Gap and Euro/$

German economic uncertainty index rises

(by Mike Dolan, Twitter: @reutersMikeD; editing by Kirsten Donovan)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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