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The Influence of US Dollar Funding Conditions on Asian Financial Markets

Author

Listed:
  • Junkyu Lee

    (Asian Development Bank)

  • Peter Rosenkranz

    (Asian Development Bank)

  • Arief Ramayandi

    (Asian Development Bank)

  • Hoang Pham

    (Oregon State University)

Abstract

More than 20 years after the Asian financial crisis, the region’s continued high reliance on United States (US) dollar-denominated funding has significant implications for the transmission of global financial conditions to domestic financial and macroeconomic circumstances. Given limited domestic capital market-based financing solutions, a high reliance on funding denominated in US dollars renders countries vulnerable to changing global financial and liquidity conditions. Using a dynamic panel and a vector autoregression model to assess the exchange rate as a possible transmission channel, we find that changes in bilateral US dollar exchange rates can have a significant impact on sovereign credit risk. In particular, a depreciation of the domestic currency against the US dollar leads to a widening of the sovereign bond spread. This finding suggests a significant relationship between US dollar funding exposure, US dollar liquidity conditions, and domestic financial conditions in some emerging Asian economies, and thus highlights one source of structural vulnerability. Given that the magnitude of the effects varies across countries, policy makers need to monitor closely the interplay between the exchange rates and local financial market conditions with tailored prescriptions for domestic financial resilience.

Suggested Citation

  • Junkyu Lee & Peter Rosenkranz & Arief Ramayandi & Hoang Pham, 2021. "The Influence of US Dollar Funding Conditions on Asian Financial Markets," ADB Economics Working Paper Series 634, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0634
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    References listed on IDEAS

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    1. Bagsic, Cristeta & Bayangos, Veronica & Moreno, Ramon & Parcon-Santos, Hazel, 2025. "The impact of currency depreciation and foreign exchange positions on bank lending: Evidence from an emerging market," Emerging Markets Review, Elsevier, vol. 66(C).

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    Keywords

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    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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