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| US Dollar Review |
The US Dollar Index's overall trend, revealed by trends of price, leverage, and time, are defined in The Matrix for subscribers.
Subscriber Comments
It's easy to stumble upon some version of the Dollar is Dead narrative while browsing the Internet. The reasons for the dollar's demise range from hyperinflation to the fall of the petrodollar and the rise of the petrol yuan. The latter argument, which is actually fake news when compared to how markets truly operate, has been eagerly adopted by gold enthusiasts and crypto supporters on social media. The notion that every new generation gets ensnared in is downright laughable when you consider what truly drives the world's core currency.
Most people talking down the dollar are indirectly suggesting that currencies like the Euro, Yen, and Canadian Dollar, as well as other peripheral currencies, will soar as the dollar declines. We delve into this false assumption in the US Dollar Report. This is not how empires transition.
Dollar Liquidity Crisis Emerging
Foreign banks hold over $16 trillion in U.S. dollar assets, comparable to the $22 trillion held by U.S. banks, but lack access to the Federal Reserve’s emergency liquidity facilities. This makes them more vulnerable to dollar funding shocks, as they cannot rely on the Fed as a lender of last resort during crises.
Using data from 40 large foreign banks across 14 countries (2003–2022), researchers identified 22 episodes of sharp declines (over 10%) in dollar liabilities. These drops were often accompanied by smaller reductions in dollar assets and modest increases in non-dollar assets and liabilities. This suggests that foreign banks partially offset lost dollar funding by using foreign exchange swaps—borrowing in local currency and converting it into dollars synthetically. However, due to market frictions, synthetic dollar funding is costlier and not a perfect substitute for direct borrowing.
A model developed by researchers shows that such dollar shocks can weaken a bank’s balance sheet and increase the risk of a default or bank run, especially since local central banks cannot provide dollar liquidity. In severe cases, a dollar liquidity crisis could trigger a self-fulfilling run on foreign banks.
To address this, the Federal Reserve has established dollar liquidity swap lines with major foreign central banks since 2007. These allow foreign central banks to access dollar funding and, in turn, support their local banks. While usage of these swap lines is typically low, they serve as a critical backstop during crises (e.g., 2008, 2020). The mere existence of swap lines can prevent panic by reassuring creditors, and in extreme scenarios, active use of these facilities may be necessary to prevent systemic dollar bank runs abroad.
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