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In swaps we trust? Disappearing dollars drive currency trading dependence

Section: Daily Dispatches

By Olga Cotaga
Thursday, November 14, 2019

LONDON -- As dollars dry up, global finance is growing increasingly dependent on opaque currency trading to keep cash flowing.

Banks and other short-term dollar borrowers are becoming ever more reliant on the $3.2 trillion-a-day foreign exchange swap market, data shows, leaving them dangerously exposed should U.S. lenders stop feeding the system, even if only temporarily.

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Swaps users had a scare in September, when the U.S. Federal Reserve had to pump cash into markets as rates in the $2.2 trillion U.S. “repo” market spiked and spilled into FX swap markets, sending the premium to borrow dollars shooting higher.

“It affected us in the FX swaps market a great deal. There was a lot of panic around, spreads widening, increased volatility,” said James Topham, a forex forwards trader at Canadian bank BMO, adding that on Sept. 16 “unusually large and persistent” dollar borrowing was evident from clients.

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