Stronger USD straining global financial markets, banks: BIS

A stronger U.S. dollar is putting strains on global financial markets and the banking system, leading to tensions not only in emerging market economies, but in "safe haven" currencies such as the Japanese yen and the Swiss franc, BIS (Bank of International settlements) Economic Adviser and Head of Research Hyun Song Shin said on Wednesday.

"The key takeaway is that a stronger dollar is associated with more severe market anomalies," Shin said at the World Bank's "The State of Economics, The State of the World" conference.

The relationship, known as covered interest parity, ensures that interest rates implicit in currency markets are consistent with those in money markets. That relationship broke down during the stresses of the financial crisis, and deviations have reappeared in the last 18 months as the dollar has strengthened, noted Shin, adding that the size of the deviations has fluctuated in step with a stronger dollar.

He explained that the breakdown reflects, in part, the tensions created by the divergence of monetary policy among major central banks and the withdrawal of easy dollar credit conditions that prevailed after the financial crisis, all in the context of the dollar's special role in the global financial system.

"The amazing thing is that this is true not only for emerging markets, but also for 'safe haven' currencies such as the yen and Swiss franc," he added.

As the dollar has strengthened, investors have found it harder to roll over hedges put in place when the U.S. currency was depreciating and investors were borrowing more in dollars to take advantage of low interest rates, he concluded.

BIS global liquidity indicators show that non-bank borrowers outside the United States owed 9.7 trillion dollars; a third of that, or 3.3 trillion, was owed by borrowers in emerging markets. Endit