Dollar Funding Strains Trigger Global Swap Lines

A sharp scramble for dollars emerged as corporates drew credit lines and asset managers sold liquid holdings, pushing three‑month FRA‑OIS wider and cross‑currency bases deep into negative territory. Euro and yen basis levels mirrored 2008‑style dislocations, while prime money market funds faced heavy inflows and CP markets thinned. In that vacuum, term funding grew scarce, and bid‑ask spreads gapped across major FX pairs as dealers guarded balance sheets.

Policy makers moved quickly. The Fed expanded repo operations, relaunched the PDCF, and reactivated USD swap lines with major central banks, later moving to daily operations and adding temporary facilities for more jurisdictions. These steps curtailed tail risk by backstopping dealer balance sheets and smoothing funding transmission, even as volatility persisted in basis markets and implied FX funding remained elevated.

The market impact radiated across EM FX and credit, where dollar scarcity amplified local selling pressure and curtailed new issuance. In Europe and Japan, hedged returns were pinched as basis costs surged, complicating asset‑liability management for insurers. We prioritized capital preservation and operability, accepting carry give‑ups in exchange for assured access to dollars through diversified instruments.

In client portfolios, we lifted cash and T‑bill ladders, layered short‑tenor FX forwards to pre‑fund near‑term USD outlays, and maintained optionality via OTM calls on safe‑haven currencies. We also trimmed exposures reliant on unsecured funding, and selectively lent balance through high‑quality repo. As swap lines bit, we normalized tenor step‑ups, ready to redeploy risk into oversold FX once basis normalized.