Liquidity Now A Hindrance?
ECB President Draghi frustrated euro bears on Wednesday by refusing to dwell too much on the issue of shrinking excess liquidity. Denying even that there was even an actionable link with front-end rates (and implicit tightening), the prospect of continued liquidity withdrawal, at least in the short term, will remain a barrier against euro downside. Meanwhile, the Fed’s inaction has been credited with keeping the dollar cheap in both FX and funding terms. However, it would be unwise to blame everything on the Fed alone. Judging by some of the structural trends developing in funding markets, it appears that the dollar’s liquidity preference has dropped sharply and structurally. Either this is a healthy consequence of improving financial and economic conditions, or global markets
are being dangerously complacent.
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