Lesson 4
Cross-Border Dollar Funding
In a crisis, watch for signs of dollar shortage: DXY spiking, Treasury yields rising (should fall in normal risk-off), FX swap line usage increasing. This signals systemic stress requiring Fed intervention. The Fed's swap lines are the fire hose that puts out global dollar fires.
The global financial system runs on dollars, but most of those dollars exist OUTSIDE the United States. Understanding this offshore dollar system is essential for crisis analysis.
FX Swap Lines:
When foreign banks or companies need dollars and can't get them in private markets, their central banks can tap the Fed's FX swap lines:
- Foreign central bank sends their currency to the Fed
- Fed sends dollars to the foreign central bank
- Foreign CB distributes to local banks
- At expiry, currencies are swapped back
These were activated massively in 2008 and 2020. They're the Fed's way of being the global lender of last resort.
The Eurodollar System:
Eurodollars are dollars held in banks OUTSIDE the US (not just Europe — anywhere offshore). This is a massive system:
- Estimated $10-13 trillion in eurodollar deposits
- Not directly controlled by the Fed
- Can expand or contract independently of Fed policy
- When eurodollar credit contracts, it's deflationary globally even if the Fed is easing
The Dollar Shortage Signal:
When the dollar is strengthening AND global risk assets are selling AND Treasury yields are spiking, you may have a global dollar shortage. This is different from normal risk-off (where Treasuries rally). In a dollar shortage, even safe assets sell because people need dollars, not safety.
Check your understanding
Lesson Quiz
Quiz Check
What are eurodollars and why do they matter?
Quiz Check
In a crisis, the dollar is surging AND Treasury yields are spiking (not falling like normal risk-off). What does this signal?