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Home Investing in Forex BIS Warns of Potential Dollar Surge Amid $113 Trillion FX Swap Risks

BIS Warns of Potential Dollar Surge Amid $113 Trillion FX Swap Risks

by Barbara

The Bank for International Settlements (BIS) has issued a cautionary alert regarding a potential surge in demand for U.S. dollars triggered by instability in the global foreign exchange (FX) swap market, currently valued at approximately $113 trillion.

This market predominantly involves short-term dollar-denominated liabilities held by funds and non-bank financial institutions, which are often kept off balance sheets and thus obscure the true leverage and risk exposure of these entities.

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Hyun-Song Shin, head of BIS’s monetary and economics department, highlighted that if investors begin unwinding these FX swap positions amid heightened market volatility, a scramble for U.S. dollars could ensue.

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Since these swaps require repayment in dollars despite investors holding other currencies such as euros or yen, a rapid need to roll over or settle these obligations would intensify dollar demand, potentially causing a sharp appreciation of the U.S. currency.

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This warning comes in the context of recent market disruptions, including escalated trade tensions and tariff policies, as well as Moody’s downgrade of the U.S. sovereign credit rating from triple-A status due to rising government debt levels.

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The unusual simultaneous decline in U.S. stocks, bonds, and the dollar itself suggests a possible strategic reassessment by investors regarding their exposure to U.S. assets.

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For market participants, this scenario implies a need to reevaluate portfolio risk and hedging strategies, as a sudden dollar surge could significantly impact currency markets and asset valuations globally.

The BIS’s analysis underscores the fragility of current financial conditions and the potential for a rapid shift in liquidity dynamics driven by off-balance-sheet FX swap exposures.

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