The recent US dollar surge may owe more to policy-makers in Europe and China than to the efforts of central bankers in the US.
Both the People's Bank of China and the European Central Bank have begun relaxing monetary conditions by increasing liquidity in financial markets, according to data compiled by CrossBorder Capital in London.
Market liquidity provided by the central bank in China, as measured by the Global Liquidity Index™ (GLI™), expanded for the 6th straight month in February to show a reading 65.8, as officials in Beijing sought to offset contraction in the private sector. Overall liquidity conditions in China remain tight at 41.9. A reading above 50 denotes expansion, a reading below 50 a contraction.
The monetary stance in Beijing is being echoed in Frankfurt, where the European Central Bank began easing liquidity conditions even before the start of its quantitative easing programme. Central bank liquidity in the euro area was as 65.9 in February compared with 28.3 six months earlier.
"The PBOC is definitely easing — the data show looser conditions which are likely to be confirmed when the RMB begins to slide," said CrossBorder Capital's Managing Director, Michael Howell, who has been tracking liquidity data since the late 1980s. "China is addressing its problems and it is leading the way among other emerging markets, where the Bretton Woods II system of dollar pegs is quietly being abandoned."
"The biggest increase in liquidity is taking place in the eurozone even before the ECB had got going," said Howell. "A lot of that liquidity has come from the private sector."
Still, the amount of money available for investment globally has fallen by just over $6 trillion over the last six months, amid a sharp deterioration in the US corporate cash flows that have been underpinning Wall Street's bull run, said Howell.
"Our models a showing a slight risk off reading," he said.
Current levels of liquidity do not yet signal recession, but point instead to economic slowdown in the US over coming months, greater market volatility and will prompt the Fed to keep rates steady. Treasury yield curves will continue to flatten and corporate credit spreads widen.
The Global Liquidity Index™ (GLI™) – which tracks global money flows – stood at 39.6 in February compared with 41.7 in January — the sixth straight month of contracting monetary conditions. US private sector liquidity remained strong at 72.2 in February, but 10 points off its peak in August.