Yankee Weight on the Dollar

Foreign businesses, especially financial firms, are issuing a great deal of debt in the US and as they convert out of dollars this seems to be one of the factors that may be weighing on it.

In the first two weeks of the news years, foreign financial firms, notably European banks and insurance companies, have raised $36.4 bln in the US. This is the most for the first two weeks of a year since at least 1995, according to industry data. There have been 53 deals, which is more than twice the deals of the first two weeks of 2010.

Financial firms account for a little more than 80% of the Yankee issuance in the first two weeks of the year. When including non-financial firm issuance, $45.3 bln in all has been raised.

There seems to be two motivating factors. First, between sovereigns and financial firms, there is billions of euro debt that needs to be rolled over this year and the calendar is packed. Widening the investor base and issuing in a less crowded market are important draws. At the same time, with the Federal Reserve essentially by all the new Treasury supply, there may be an appetite for more dollar-denominated investment grade fixed income product.

Second, foreign issuers are also attracted to the pricing. At the end of last week, the cross-currency swap, which is how much it costs to exchange the dollars for euros, was minus 26 bp (on a five year swap). That means that it is 26 bp cheaper to issue dollar denominated debt and swap into euros rather than raising euros outright.

While the Yankee offerings may exert downward pressure on the dollar, we would place emphasis on other factors, such as Trichet's more hawkish rhetoric, the shifting out of Fed rate hike expectations, the dollar-adverse shift in interest rate differentials and the glimmer of hope that Europe will move in a preventative mode rather than largely reactive.