Surging US dollar forcing yen and euro investors to pay more

London

ONCE upon a time, the cost to hedge currency risk in global trade and finance was relatively cheap. How things change. In the pre-crisis heyday, when the cost to procure dollars staged an uptick - when implied interest rates in the currency market exceeded corresponding rates in the cash markets by a notable margin - banks would subsequently arbitrage away the difference, and move the gap close to zero.

Once viewed as a law of finance known as the "covered interest rate parity" (CIP) condition, this market dynamic unravelled during the global financial crisis and then again during the euro-area sovereign debt debacle, amid a spike in counterparty risk and a sharp reduction in dollar funding to non-US banks. These two strains - a key barometer for risk appetite…