By Dhara Ranasinghe and Saikat Chatterjee
The three-month
Analysts say the rise largely reflects increased
The spread was a leading indicator of previous dollarfunding crises in 2008 and 2011-12, and some analysts believe itcould again have significant knock-on effects, particularly whencentral banks are winding down crisis-era stimulus policies.
Here are five pressure points that investors are watching tosee if the surge escalates into a global dollar funding crisis.
1/ Non-
A blowout in the
Investors say this shows there is no widespread rush tosecure cheap funds elsewhere.
"If this was a crisis sign in the market, then we would seeother spreads blow out as well at the same time, which we saw inthe last financial crisis and in the euro zone crisis," TimForster, portfolio manager at Fidelity International, said.
Andrew Milligan at Aberdeen Standard Investments, said onevulnerability could be emerging markets that borrow in dollarsor have currencies pegged to the dollar.
The
2/ Currency hedges
One of the first places where a rush for dollar fundingescalates is in the arcane but deeply liquid world of currencybasis swaps, used by institutional investors to hedge theirforeign bond investments.
During the 2008 financial crisis and the 2011-2012 euro zonedebt crisis, banks, especially non-
But this time around, funding pressures are absent. Ifanything, these markets are indicating a surfeit of dollars withcurrency swaps in yen and euros at five-year highs.
This is due to increased regulations forcing global banks tokeep more reserves and because banks anticipated the increasedissuance of
3/ Corporates
Instead of seeking dollars in
With Libor, a reference rate for
This week has seen HSBC,
A surge in outstanding
This impacts the Libor fixing as commercial paper rates aretaken into consideration by the panel of banks for Libor quotes.
"If the Libor/OIS spread stays as it is, we will see quite abig move higher in the dollar index and then dollar borrowingfor foreign investors becomes more expensive," Mike Riddell, afund manager with Allianz Global Investors, said.
4/ Central banks
One concern is that higher
The same could be true for the euro area as tighter
"The longer it goes on, the more pronounced the effects aregoing to be," said Charlie Diebel, head of rates at AvivaInvestors. "It complicates the efforts of policymakers becausein
Indeed, Commerzbank says the sharp rise in dollar Liborrates could be seen as one additional rate hike since the Fed'sDecember meeting.
Citibank says the dollar-Libor/OIS spread has in recentyears proved a good leading indicator for the dollar index,which measures the greenback's performance against other majorcurrencies. Wider spreads tend to lead to a strongerdollar, with a three-month timelag.
"We are still forecasting dollar weakness on fundamentalgrounds – together with almost everyone else," the bank said."But if dollar liquidity tightening does lead to a strongerdollar, all of these processes have the ability in principle torun in reverse."
(Reporting by Saikat Chatterjee and Dhara Ranasinghe;Additional reporting by Sujata Rao and Abhinav Ramnarayan;graphics by Ritvik Carvalho and Saikat Chatterjee; Editing byAlexander Smith)