Dollar LIBOR Normalizes and US Dollar Index Declines as Eurodollar Short Squeeze Ends

Dollar LIBOR, and the related TED spread, is the 'tell' for these dollar index spikes related to eurodollar short squeezes. As european banks scramble to obtain US dollars to satisfy customer demand, they drive the 'price' of the dollar higher. The cause of the squeeze in this case was the euro uncertainty based on ratings downgrades on Greece and a few other EU member countries, and the hedge funds determined selling of the euro, which created a sell off in euros and a flight to dollar assets. There is also continued deterioration in MBS and other instruments denominated in dollars and held in the euro banks on behalf of customers.



The US dollar index tracks the eurodollar LIBOR to a remarkable degree. When the BIS data comes out for this period in time I am sure we will see a repeat of the squeeze in eurodollar deposits that we had seen in the last two dollar rallies.

Why is this significant? Because it shows that there is no fundamental trend change in the US dollar, which is in a long sideways 'chop' and still likely to head lower.



Although I am sure the Fed swaplines were utilized, the Financial Times reports that some of the european banks have been trading their own customers' gold for BIS dollar reserves.