Race for liquidity boosts dollar as Russia contagion risk rises

The dollar is rising against virtually every peer as fallout from the sanctions levied against Russia supercharge demand for the world’s reserve currency. 

Traders are hungry to secure dollar liquidity as penalties on Russia’s central bank and lenders reverberate through global markets, with talk that the Federal Reserve may have to intervene in global markets. U.S. and European stock futures fell, while currencies from the euro to the rand dropped.

“USD is king, offering liquidity and safe haven attributes,” said Rodrigo Catril, a currency strategist National Australia Bank Ltd. “When trouble hits the road, you need to look for cover.” 

Signs of funding strains are apparent in major money markets Monday as spreads widened for very short-term eurodollar contracts. The gap between future Libor and Fed rates—the FRA/OIS spread—widened for one-month contracts the most since March 2020. March eurodollar contracts dropped relative to June peers, a classic sign of funding stress.

That comes as Credit Suisse Group AG warned of how the decision to exclude some Russian banks from the SWIFT messaging system could impact money markets as payments are missed and giant overdrafts are made. Strategist Zoltan Pozsar drew comparison with how the Fed had to supply dollars during the height of the pandemic panic in March 2020.

A gauge of the dollar rose as much as 0.7%, extending on last week’s 0.4% gain. Global bonds rallied, with 10-year Treasury yields dropping 7 basis points to 1.89% while yields on Australia’s 10-year government debt slumped as much 10 basis points. 

CME ruble futures tumbled more than 30% after the open, though some trades subsequently started to trickle through, according to Matthew Simpson, senior market analyst at City Index.

SWIFT Risk

The Bank of Russia has more than $640 billion in foreign-currency reserves, with most of it held overseas, according to Bloomberg Economics, which plotted out a worst-case scenario where it loses access to everything other than its gold and yuan holdings.

“Russia’s ex-communication from SWIFT would isolate Russia financially from the world and could cripple its economy,” Jason Schenker, president of Prestige Economics, wrote in a note.

SWIFT is used for trillions of dollars worth of transactions around the globe.

“Europe is bearing the brunt of the invasion’s initial impact, with higher energy costs hurting consumers and the level of sanctions pressuring European growth, with a knock-on effect for U.S. growth prospects,” Scott Glasser, chief investment officer at Clearbridge Investments and investment specialist Jeff Schulze, wrote in a note.