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US Dollar Scarcity May Endure Despite Fed’s Bold Coronavirus Response

US Dollar Scarcity May Endure Despite Fed’s Bold Coronavirus Response

David Cottle, Analyst


What's on this page


  • When market stress increases, so does the risk of a damaging ‘credit event.’
  • Central banks know this well and are pumping in liquidity to offset the risk
  • However, the complex funding of global supply chains still poses questions

The coronavirus has seen global monetary authorities reach for their well-thumbed crisis playbook as they try to maintain at least access to credit in global markets. This is to head off, among other things, the chances of a “credit event” which could see the now-unavoidable downturn metastasize into something far worse.

Monday sees the start of the seventh Federal Reserve plan announced at the end of March to try to ensure a global supply of US Dollars as the coronavirus drains liquidity and threatens the supply of credit. Under the temporary Foreign and International Monetary Authorities repurchase arrangement (FIMA), global entities like central banks with holdings of US Treasuries will be able to swap them for greenbacks.

This implicit acceptance by the Fed of responsibility for the US Dollar funding market globally, and not just at home, is probably one reason why riskier assets have stabilized at least to some extent, following the hammerings of recent weeks.


Market focus on the spread of credit market difficulties into the global economy has been intense since the financial crisis. Back then supply chains were broken as doubts about the solvency of previously unquestionable financial institutions caused counterparties to simply walk away, often leaving cargoes unloaded at ports or stuck at the dockside.

The complexities of ‘supply chain finance’ are once again becoming a worry for market watchers.

The Wall Street Journal weighed in this week with an article calling it a ‘new risk’ in the coronavirus crisis. It points out that all three major credit rating agencies have warned in the past month of the dangers inherent in touch conditions of the deals now routinely made in this largely opaque form of financing which allows trade partners to defer payments to suppliers, improving cash-flow.

Companies effectively borrow money to meet their bills, which might mean extending nominally one-month payment terms out to six months of longer. The arrangement gives firms cash-flow flexibility, but it can make them look more credit-worthy than they because the deals don’t necessarily count as ‘borrowing’ on their accounts. They get filed in the ‘trade debt’ or ‘accounts payable’ columns on firms’ balance sheets instead. In usual trading times this is rarely a problem. But these are not usual trading times.

No one knows the exact scale of this supply chain lending, but it’s been estimated at hundreds of billions of dollars globally, with a potential market size perhaps even bigger than that. Sectors where it’s reported to be especially popular include telecoms, chemicals, aerospace, retail and packaged consumables.

These financing arrangements have grown in importance as the coronavirus brings a cash crunch with it. The risk of course is that banks may stop providing cash to companies, forcing them to pay their bills much more quickly at a time when their own accounts may be illiquid.


The US Dollar has soared against this backdrop as the prospect of a credit-market lockup to match global coronavirus containment efforts fuelled a rush for cash. Financial authorities have acted swiftly to provide massive liquidity, with the Fed in the vanguard as it ought to be. All the same, it’s likely to be in those corners of the market generally un-regarded in the good times, such as supply-chain finance, that some of the greatest threats may lie.

As with subprime finance in 2008, it’s only when market stresses become unbearable that the full scale of the market, and the problem, becomes clear. With this in mind, the US currency may have room for yet another foray to the upside as funding stress returns and liquidation follows.


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--- Written by David Cottle, DailyFX Research

Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.