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Hunting for Dollars

Author

Listed:
  • Peteris Kloks

    (University of St. Gallen)

  • Edouard Mattille

    (University of St. Gallen)

  • Angelo Ranaldo

    (University of Basel - Faculty of Business and Economics; Swiss Finance Institute; University of St. Gallen)

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.

Suggested Citation

  • Peteris Kloks & Edouard Mattille & Angelo Ranaldo, 2024. "Hunting for Dollars," Swiss Finance Institute Research Paper Series 24-52, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2452
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4969258
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    More about this item

    Keywords

    US Dollar; Global Banks; FX Swaps; Repos; Intermediary Constraints; Covered Interest Parity; Regulation;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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