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Dollar Swaps & TheFinancial Crisis
A Brief Overview of the Dollar Shortage of 2008
Kristjan Velbri
1.01.2010This aim of this short report is to give some insight to the dollar liquidity swaps initiated bythe Federal Reserve Bank of the United States and the market conditions that precipitatedthe need for such arrangement.
Dollar Swaps & The Financial Crisis: A Brief Overview of the Dollar Shortage of 2008
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Page 2010©
Kristjan Velbri www.kristjanvelbri.com
Introduction
This aim of this short report is to give some insight to the dollar liquidity swaps initiated bythe Federal Reserve Bank of the United States and the market conditions that precipitatedthe need for such arrangement. This report is not an official document and was put together by a non-professional. The facts used and claims made in this report are known tobe true as far as the author comprehends the issue at hand. Although the report goes intosome detail in regard to financial innovation and derivatives, the author acknowledges that his understanding of financial instruments is limited at best. Furthermore, it is not the aimof this report to give a comprehensive overview of derivatives. Readers are welcome topoint out factual, conceptual and other errors and suggestions to the author by e-mail:kristjan@kristjanvelbri.comThe report is divided into three parts: the first part takes a look at what led to thevulnerabilities that precipitated the need for dollar swaps, the second part examinesfinancial innovation and the last part sheds light on the dollars swaps.Kristjan Velbri, authorJanuary 2010
Dollar Swaps & The Financial Crisis: A Brief Overview of the Dollar Shortage of 2008
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Page 2010©
Kristjan Velbri www.kristjanvelbri.com
What Happened to the US Dollar in 2008?
2008 witnessed a spectacular rise in the US dollar. During 2008, the US dollar index
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went from the low 70s to high 80s in just four months. After reaching a high of 89.62 in March of 2009, the dollar resumed its long-term downtrend. Yet the mainstream media is stillpainfully oblivious to what actually happened. All the talk about a fligh
t to safety doesn’t
really explain anything aside from the fact that most people who work for the financialnews media know next to nothing about how the financial markets really work.The short answer is that it was a liquidity crisis, a credit crunch, whichever one you likebest. The simple explanation is that the banks and other big market participants had toprovide more capital to back their positions, which were blowing up in their faces all theway through the financial crisis. Their claims were denominated in dollars and as the valueof those claims fell, they had to increase their dollar deposit. But before moving on we needto look at the reason banks got into trouble in the first place. Following is a short overviewof financial innovation as it relates to the financial and mortgage crisis of 2007-2009.
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The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. See Wikipedia for details: http://en.wikipedia.org/wiki/U.S._Dollar_Index
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