Rush for US Dollars May Be Around the Corner, Mizuho Says

(Bloomberg) -- The swaps market is flashing warnings there could be a dash for dollar liquidity on a scale last seen at the start of the pandemic, according to Mizuho International Plc.

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Andra Belcea, head of cross-currency swaps trading at Mizuho, flags the cross-currency basis — a measure of the extra cost non-US banks face when sourcing dollars offshore instead of through their US-based branch.

Derived from the cost of exchanging cash flows in one currency for those in another, it shows the cost of dollars is now near the lows seen after central banks took emergency steps to pump liquidity into markets in the wake of the pandemic.

“Risky asset classes are doing great,” said Belcea. “But the market is wondering when the music will stop.”

There were tremors earlier in the month, when the situation in the Middle East threatened to escalate, triggering a jump in demand for dollars. A year ago, the collapse of Silicon Valley Bank in the US spurred a much bigger rush.

And if US rates remain lofty, US banks may allocate more dollars onshore, buying Treasury bills or parking them at the Fed’s reverse repo facility instead of lending them overseas.

Diminished bets on Federal Reserve interest-rate cuts helped send the dollar to a five-month high earlier this month.

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