Dollar turn-around tied to swap lines and Fed cut

Surprisingly,dollars have been in short supply for many emerging markets. The dollar squeeze has been a contributor to the fall-off in emerging market currencies, but the decision to extend swap lines to foreign central banks, Mexico, Brazil, South Korea and Singapore has eased the pressure. Each country has received a $30 billion swap line. This intervention to provide dollars reduces the pressure to delever dollar hedges or funding. If the demand for dollar is reduced because the local banks extend credit then the currency sell-off from this market segment will be reduced.

The Fed cut of 50 basis points and the decline in many USD money market rates has also eased some of the dollar demand. Clearly there was a flight to home currencies and an exit from emerging market equities as the world became risk averse, but the size of the October moves weer exacerbated by technical issues which can be be mitigated through the opening of swap lines. The Fed however helped only four countries and the IMF will have to step in and provide funds to other or there will be a differential between have and have-not emerging markets.

Nevertheless, the impact on emerging markets of easing emerging currency pressures has been across the board with PLN, ZAR and TRY all up double digits this week. The impct of the dollar rise in many countries is real and is secondary effect which will further slow global growth. The world needs cheap dollars.