Dollar liquidity conditions in Asia have been tightening recently, too. In South Korea, the one-year won basis swap widened to about negative 90 basis points, from negative 55 basis points only two weeks earlier. Meanwhile, in Hong Kong, dollar funding is as tight as the 2011 European financial crisis, going by data from cross-currency swaps.
In the asset management world, the dollar is still the king. If it’s hard to get a hold of them, that doesn’t bode well for risk assets.
Just look at the Korean won, which sank to a 10-year low Tuesday, even though Seoul has been doing a lot of the right things, accumulating its foreign currency reserves and reducing its reliance on short-term external debt. Meanwhile, some Korean stocks have become dirt cheap. The country’s banks, for instance, are trading at only 0.2 times book, data compiled by Bloomberg Intelligence show, making them almost as unloved as the industry’s basket case, Deutsche Bank AG.
Then consider Hong Kong. In February, even with China in the throes of the virus outbreak, the dollar bond market stayed afloat, with mainland developers raising a whopping $6.4 billion. But the funding squeeze has changed the calculation entirely: The total value of Chinese dollar bonds yielding above 15% more than doubled from a week ago. That means China Inc.’s borrowers will have to pay a lot more — and, unfortunately, the offshore market is about the only place big enough to place the half-a-billion-dollar issues they rely on.
While the Fed has taken action on American soil, it could expand its swap lines with more central banks. It’s understandable that the Fed doesn’t want to be the world’s lender of last resort, but it’s a little too late for that: The dollar greases the pipes of global finance. Funds can’t flow freely if things are clogged on the other side of the Pacific.
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