The COVID-19 Pandemic Exposes Asian Banks’ Vulnerability to US Dollar Funding
2021
The COVID-19 pandemic has been unraveling global financial markets and testing Asia’s financial resilience at a time that Asian and global economic activity have slowed due to prolonged trade uncertainties. While it began as a health crisis, this pandemic could turn into an economic and financial crisis if not swiftly contained. Across the region, stock markets have crashed, currencies have tumbled, and short-term capital has taken flight, underscoring fragile market sentiments. Amid flight to safety, the demand for the US dollar has soared. While multiple factors (primarily driven by fear of a precipitous economic slowdown) are behind the surge in demand, it is a global rush to unwind carry trades that drove a rise in dollar funding costs in the interbank and foreign exchange swap markets (Figure 1)…
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