3 ms·

If I ask to convert my EUR into USD, the US bank will hold more EUR, less USD. Less USD decreases my liquidity, which is what's on one end of the table in the r

If I ask to convert my EUR into USD, the US bank will hold more EUR, less USD. Less USD decreases my liquidity, which is what's on one end of the table in the repo market, no?

qeternity 7y ago
They don’t hold EUR, just EUR denominated assets. But irrespective of what currency you’re repoing, USD balances go down...that’s the whole point. They’re lending. That’s how lending works.
- nostrademons 7y ago
  If it's actually European firms participating in the carry trade, then yes it would be EUR. When you decide to sell your S&P 500 index fund for Bitcoin, you don't actually directly exchange your USD-denominated assets for Bitcoin. Last I checked Vanguard was not willing to service redemptions in crypto. Rather, you sell the fund, receive USD for it, and then use the USD to purchase Bitcoin. Same goes for ordinary foreign currency transactions. If you want to short negative-yielding Eurozone bonds and buy positive-yielding US treasuries, you borrow the bonds and sell them, receiving EUR in the process. Then you transfer the EUR to a US bank and receive dollars. Then you use the dollars to buy US bonds. Your European counterparty is now long European bonds and short euros. Your U.S. banking partner receives the euros you got from them and gives you currency. You give the currency to the U.S. government and buy the bond. To make the currency transactions net out, the U.S. government then needs to give currency to the bank to replace the reserves you took out to buy the bonds. (In reality, the Fed doesn't have to make the transactions net out, because it can adjust the money supply. But if it wants to maintain the current interest rate in the face of strong demand for dollars to arbitrage away interest rate differences, it needs to hand out a lot of dollars.)

3 ms·

If I ask to convert my EUR into USD, the US bank will hold more EUR, less USD. Less USD decreases my liquidity, which is what's on one end of the table in the r

by throwaway8291 7y ago

If I ask to convert my EUR into USD, the US bank will hold more EUR, less USD. Less USD decreases my liquidity, which is what's on one end of the table in the repo market, no?

qeternity 7y ago
They don’t hold EUR, just EUR denominated assets. But irrespective of what currency you’re repoing, USD balances go down...that’s the whole point. They’re lending. That’s how lending works.
- nostrademons 7y ago
  If it's actually European firms participating in the carry trade, then yes it would be EUR. When you decide to sell your S&P 500 index fund for Bitcoin, you don't actually directly exchange your USD-denominated assets for Bitcoin. Last I checked Vanguard was not willing to service redemptions in crypto. Rather, you sell the fund, receive USD for it, and then use the USD to purchase Bitcoin. Same goes for ordinary foreign currency transactions. If you want to short negative-yielding Eurozone bonds and buy positive-yielding US treasuries, you borrow the bonds and sell them, receiving EUR in the process. Then you transfer the EUR to a US bank and receive dollars. Then you use the dollars to buy US bonds. Your European counterparty is now long European bonds and short euros. Your U.S. banking partner receives the euros you got from them and gives you currency. You give the currency to the U.S. government and buy the bond. To make the currency transactions net out, the U.S. government then needs to give currency to the bank to replace the reserves you took out to buy the bonds. (In reality, the Fed doesn't have to make the transactions net out, because it can adjust the money supply. But if it wants to maintain the current interest rate in the face of strong demand for dollars to arbitrage away interest rate differences, it needs to hand out a lot of dollars.)