Hunting for Dollars

Using novel granular data on the global flows of wholesale and synthetic dollar funding, we show that constrained non-US banks substitute dollar borrowing from US repo markets with foreign exchange (FX) swaps at the quarter-end. As wholesale borrowing is encumbered by shadow costs, non-US banks satisfy their inelastic dollar demand by obtaining synthetic funding, for which they are willing to pay a heightened cross-currency basis. Eurozone banks in particular hunt for dollars by engaging in such repo-FX swap substitution, with the benefits largely accruing to US dealers. Our study explains the increase in synthetic dollar borrowing and deviations from covered interest rate parity (CIP) observed at the quarter-end and uncovers how global banks manage short-term dollar liquidity across multiple money markets.