What Drives Dollar Funding Stress in Distress?

Abstract

We study the forces driving dollar funding stress under adverse market conditions for Asia-Pacific economies. We find that the response of dollar funding conditions to changes in macro-financial variables differs significantly between orderly and turbulent markets. In orderly markets, idiosyncratic dollar strength, currency volatility and monetary policy divergence are key factors affecting the stress for the economy. Currency expectations and FX market liquidity also play an important role in determining long-term funding pressure. In turbulent markets, the effect of these variables, except idiosyncratic dollar strength and currency volatility which retain a strong influence, diminishes or even vanishes. Instead, the credit worthiness of the government and corporate sectors, which is found to have little impact under normal market conditions, emerges as a major stress determinant, and becomes increasingly influential as adversity intensifies.