US Markets

Swap lines no fix for emerging markets trounced by strong dollar

Credit: REUTERS/AMR ABDALLAH DALSH

Persistent weakness in emerging Asian currencies on Friday and enduring stresses in dollar funding markets showed that a spate of hurried swap lines between central banks had done little to alleviate the credit strains at the heart of the problem.

By Vidya Ranganathan

SINGAPORE, March 20 (Reuters) - Persistent weakness in emerging Asian currencies on Friday and enduring stresses in dollar funding markets showed that a spate of hurried swap lines between central banks had done little to alleviate the credit strains at the heart of the problem.

Currencies such as the South Korean won KRW= came off their lows but very slightly after the U.S. Federal Reserve signed swaps with the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to allow them to tap up to $450 billion.

That money is meant to help markets scrambling to get their hands on U.S. dollars because of worries about how badly the coronavirus pandemic will hit businesses and the world economy.

"More dollar swap lines with central banks will be needed before the global economy stabilizes, but some point, there will be enough dollar supply to calm the markets," said Montreal-based Mathieu Savary, a strategist at BCA Research.

"Gold prices are an indication that we are not there yet in terms of sufficient dollar liquidity."

Prices of safe-haven gold XAU= are down more than 3% this week as investors rushed to dump the most liquid assets in a bid to raise cash.

Dollar funding remained at a premium, with investors paying 169 basis points (bps) over interbank rates to swap 3-month Korean won KRWCBS3M= into dollars, nearly three times the level last month.

They were paying 46 bps more than interbank rates to swap euros into dollars EURCBS3M= on Friday, half the level early this week but still three times the average premium last month.

The won KRW= is off the 2008 lows it hit on Thursday but still down 7% in two weeks.

The central bank swaps had managed to get more dollars into the banking system but the flow of that cash into brokerages, companies and other end users of dollar funding was still hamstrung by concerns over credit quality, analysts said.

And those would persist until wider concerns over economic activity, which has ground to a near halt on account of the virus, abated.

"While the additional swap lines announced by the Fed today seem to have given respite to a few embattled currencies, they may not be sufficient to stop the dollar in its tracks," Oliver Allen of Capital Economics wrote, terming the swaps as "a necessary, but not sufficient, condition to turn the tide."

"A sustained retreat of the dollar may have to wait until the coronavirus outbreak shows clear signs of fading."

Thursday's swaps were in addition to the permanent swaps the Fed has with central banks in Canada, the United Kingdom, Japan, Switzerland and with the European Central Bank.

The Federal Reserve provided $45 million of liquidity to foreign central banks in the latest week via its swap lines, the New York Fed said on Thursday.

The rush for dollar funding has pushed the dollar =USD up 4% this month against a basket of peers, and sent almost every other currency reeling.

The biggest losers in emerging markets have been the higher-yielding ones sought after by portfolio managers with heavy amounts of cheap dollar funding.

The dollar is up nearly 16% this month versus the Russian rouble RUB= and 18% against the Mexican peso MXP=. Others such as the Indonesian rupiah IDR=, Turkish lira TRY= and South African rand ZAR= also have suffered big losses.

Central banks in Indonesia, India, South Korea, New Zealand, Russia, Brazil and other places have intervened to prop up their currencies, offered dollar funding, or both. Denmark raised rates to defend its currency, even as other central banks cut them to bankroll businesses impacted by the pandemic.

Emerging market currencies sinkhttps://tmsnrt.rs/39YjsWG

(Editing by Kim Coghill)

((vidya.ranganathan@thomsonreuters.com; +65-68703090; Reuters Messaging: vidya.ranganathan.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

World Markets

Latest Markets Videos

    Reuters

    Reuters, the news and media division of Thomson Reuters, is the world’s largest international multimedia news provider reaching more than one billion people every day. Reuters provides trusted business, financial, national, and international news to professionals via Thomson Reuters desktops, the world's media organizations, and directly to consumers at Reuters.com and via Reuters TV.

    Learn More