Crisis was alert signal dollars FX flying high again

By Jamie McGeeverLONDON (Reuters) - The dollar shortage and high demand for the currency worldwide are stretching certain dollar rates more associated with periods of extreme tension in the markets, raising a red flag for the financial system levels.investment returns low Records are forcing investors in the euro zone and Japan to buy US bonds, which is having a negative and potentially costly effect yields States depressing States and the profitability of banks.On the surface, the banks are much healthier now than at any time since the 2008 financial crisis and recession. But tensions in the core markets of various currencies, including the Japanese yen, is giving the central banks of reflection.The Bank for International Settlements warned twice in the last month about the risks to global financial stability that represents the "anomalies" in the currency markets as a result of rising dollar over the past two years.These anomalies have been the subject of particular scrutiny in recent weeks as the dollar rally has subsided. But instead of pulling back tandem premium dollar funds based on the FX market it has continued to rise.FX basis, effectively the cost of changing one currency to the other without the risk of exchange rate is a measure of the lack of a currency relative to another. In benign markets, will show virtually no premium each other.Multinational companies need dollars for financing purposes, or more sophisticated investors who wish to take advantage of interest rate differentials are typically involved in basic FX markets.The demand for dollars during the 2007-08 financial crisis pushed that premium to record levels above the norm, reflecting the unprecedented effort in the system.Billions of dollars of central bank liquidity and years of zero - or even negative - interest rates that have brought low risk premium, but still significant. And the negative yields in the euro area and Japan are largely to blame.Stuart Sparks, rate strategist at Deutsche Bank (DE: DBKGn) in New York, says that demand for US assets increased performance of the euro area and Japan is causing dislocations "market" and could depress the profitability of banks United States over time."It's about reducing yields available to US banks and US assets net interest margins. And at a time of increased capital requirements, is a concern," Sparks said.The value of the shares of US banks has fallen 4 percent so far this year (BKX), low broader indices performance on Wall Street, which is 4 percent.FLATTENING CURVEThe base dollar / yen three-month currency was trading at -75 basis points, which means a premium of 75 basis points for dollar funding for loans of comparable yen. The base was around -60 bps or more for most of this year, and was approaching -100 bp at the end of 2011.The base of a coin three-month euro / dollar around -38 basis points, the most profoundly negative this year is quoted. But it was the double last year, came to -160 bp at the height of the crisis in the euro area in late 2011 and -300 bp in September 2008, when Lehman Brothers collapsed.Although well below these extreme levels, premium dollars now, eight years after the financial crisis, is remarkable. Before the crisis, the euro and dollar funding costs were virtually equal.A reflection of the growing demand for dollar funds can be seen in the increase in the issuance of dollar-denominated debt of Japanese companies this year. A total of $ 29.8 billion has been issued, 70 percent in the same period last year and the highest in more than a decade, according to data from Thomson Reuters.According to Fitch Ratings, more than $ 10 billion in government debt around the world offer negative returns, almost entirely in the euro area and Japan. Entire euro zone yields to nine years and the Japanese out of 10 are below zero.This has contributed to a flattening of the yield curve dramatically, not only in the euro area and Japan, but also in the United States.The difference between 10- and two-year yields in the United States is around 90 basis points, ie, the yield curve is the flattest since 2007. Banks prefer steep yield curves, as it means they can benefit from obtaining short-term funds cheaply and long-term loans at higher rates.The curves in the euro area and Japanese are even flatter. financial stocks in the euro zone and Japanese this year are down 30 percent <.TRXFLDJPPBANK> and 20 percent, respectively, pushing investors in US markets.But the rising cost of dollar funding could force banks to obtain dollars less conventional, such as dollar swap lines between the Federal Reserve and other open following the crisis central banks sources."Some of the basic levels that we have now gone beyond the point where services dollar credit provided by central banks have been taken by investors in the past," said Fabio Bassi, head of European pricing strategy JP Morgan in London."With some of these existing facilities, which would give a probability of less than 50 percent to more active central bank policy response."