Fabrice Coffrini/Agence France-Presse/Getty ImagesThere’s a “huge, missing and growing” problem inside the round-the-clock foreign-exchange market, and it’s one that can’t be seen. That’s according to the Bank for International Settlements, which cited trillions in dollar debt by non-U.S. borrowers contained in FX swaps/forwards and currency swaps which do not appear on balance sheets and are missing from statistics. Non-U.S. banks owe upwards of $35 trillion, while non-bank entities outside the U.S. owe as much as $25 trillion, the BIS said in a quarterly report. The total amount in outstanding obligations embedded inside the foreign-exchange market, however, is closer to “$80 trillion-plus,” the report said.“The $80 trillion-plus in outstanding obligations to pay US dollars in FX swaps/forwards and currency swaps, mostly very short-term, exceeds the stocks of dollar Treasury bills, repo and commercial paper combined,” according to the report written by Claudio Borio, Patrick McGuire, and Robert McCauley.FX swap markets, in particular, are vulnerable to funding squeezes and the lack of information about the dollar debt “makes it harder for policy makers to anticipate the scale and geography or dollar rollover needs,” they said. “Thus, in times of crisis, policies to restore the smooth flow of short-term dollars in the financial system (eg central bank swap lines) are set in a fog.”A global squeeze on dollars is one big way that the strong greenback can reverberate around the world. For much of 2022, the dollar has been on a tear and wreaking havoc, though it fell off dramatically in November — shrinking its gain over the past 12 months to 8.9% from 20.6% in late October, based on the ICE U.S. Dollar Index DXY.The Bank for International Settlements, based in Basel, Switzerland, is regarded as the central bank for central banks, with a unique but often overlooked role in the international financial system.
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