The spillover of money market turbulence to FX swap and cross-currency swap markets

3 March 2008

We analyse the spillover of the turmoil in money markets in the second half of 2007 to FX swap and long-term cross-currency basis swap markets. We find that the use of swap markets to overcome US dollar funding shortages by non-US financial institutions resulted in marked deviations from covered interest parity conditions and the impairment of liquidity in these markets.

JEL classification: G12, G14, G15.