Niall Coffey, Warren B. Hrung, Hoai-Luu Q. Nguyen & Asani Sarkar, The global financial crisis and offshore dollar markets, Current Issues in Economics and Finance, vol. 15, no. 6 (October 2009) available at http://www.newyorkfed.org/research/current_issues/ci15-6.pdf
Facing a shortage of US dollars and a growing need to support their dollar-denominated assets during the financial crisis, international firms increasingly turned to the foreign exchange swap market and other secured funding sources. An analysis of the ensuing strains in the swap market shows that the dollar ‘basis’ – the premium international institutions pay for dollar funding – became persistently large and positive, chiefly as a result of the higher funding costs paid by smaller firms and non-US banks. The widening of the basis underscores the severity and breadth of the crisis as markets designed to facilitate the flow of dollars faltered and institutions worldwide struggled to obtain funds.
A clear, concise summary of the behaviour of the US dollar during the financial crisis, focusing on divergence of NY and London interest rates by economists from the New York Fed. The authors’ conclusion: “The element common to all of these phenomena was increased funding costs, which impeded arbitrageurs from shrinking the basis between these types of securities. In addition, counterparty credit risk became prominent, and previously risk-free arbitrage trades suddenly became risky.