Dollar Funding

On the left is a 2019 schematic of the U.S. dollar funding network. It still exists today in that same form, but volumes have grown significantly larger. It also omits the US stock market which, while not systemically critical, is certainly an example of a dollar market.

Dollar funding means trading (borrowing/lending) in dollar denominated terms. Entering a EUR/USD swap to borrow dollars using euros as collateral, using those dollars to buy Treasury bonds, and then posting said Treasury bonds as collateral to obtain funding in a repo transaction are three different examples of a dollar funding transaction.

It can be thought to mean dollar access since the reality is that most institutions - businesses, banks, and investors - all over the world still prefer to make transactions in dollars.

On the right is a dollar funding chain from a BIS paper dated 2020 depicting a hypothetical cross-border flow of dollars that shows the two largest and most systemically critical funding markets, Treasury repo and dollar FX swaps, which we will examine next.

There's really no Chinese or BRICS equivalent in international scale to the dollar funding markets. As we will emphasize over the next couple posts, daily volumes regularly exceed $10 trillion cumulatively.