The U.S. dollar surged to a three-year high Wednesday as investors around the world gobbled up greenbacks amid a global stock market rout and increasing concerns over bank fund costs in a sharp economic downturn.
European banks took $112 billion in so-called "swap lines" from the Federal Reserve Wednesday, the most since the global financial crisis in 2008, amid a calculated effort with the European Central Bank to keep dollars flowing in economies outside of the United States and support international funding markets.
The Fed's global dollar life-line followed its emergency interest rate cut over the weekend, which took the Fed Funds rate to a range of 0% to 0.25%, and this week's series of repo injections and liquidity support for inter-bank lending markets on Wall Street.
"When we look at what the Fed did over the weekend, one of the more important targeted steps was to offer FX swap lines against some of the most actively traded currencies, including the Euro," said Padhraic Garvey, who heads the Americans region research team at ING. "This is an echo of the banking crisis when international players in particular had difficulty in getting access to Dollars."
"The Fed's swap line at that point was an important tool to help to maintain the integrity of the international movement of the global reserve currency," he added. "The swap lines never went away, but have now been re-tweaked and made fit for purpose for today's needs. This is an important step."
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.85% higher on the session at 100.397, a near-three year high and a move that extends its 10-day gain to around 5.5%.
The dollar's rise, however, comes in parallel with a decline in U.S. Treasury bond prices as governments around the world plan trillions in stimulus to combat the coronavirus impact on the global economy.
Benchmark 10-year U.S. Treasury bond yields backed up to 1.20% in overnight trading, before paring that move to 1.124%, as investors attempted to price in a $1 trillion addition to the U.S. deficit -- which already sits near the $1 trillion mark -- and the inevitable surge in bond sales that will be needed to fund it.
"Weaker risk appetite has not been sufficient to push bond yields even lower any more in the recent days," said Nordea Markets' rate strategiest Jan von Gerich. "It is not only the dash for cash that is driving the market, but worries that somebody needs to buy an increasing amount of bonds to finance the ballooning stimulus measures soon."
"Such worries further illustrate that there are limits to how far bond yields can fall," he added.