Après nous, le deleveraging? The rally in the U.S. dollar,coupled with seismic changes in the $2.7 trillion money-market fund(MMF) industry, is sparking a fresh bout of cross-borderdeleveraging, according to new analysis from CitigroupInc.

That's because a stronger dollar tends to pressure foreigncompanies that have borrowed in greenbacks, causing banks to cutdown on their international lending as risks in their corporateloan portfolios increase. Any pullback in cross-border lendingwould intensify concerns that the dollar rally sparked by DonaldTrump's win in the U.S. presidential elections could have aknock-on effect on economic growth around the world.

“Both MMF reform and deleveraging episodes are global growthnegative as they are both harmful for the end users of dollars,”warn Citi analysts led by Jabaz Mathai. “The shift in the U.S. froma monetary to a fiscal stimulus is conducive for dollarstrengthening which may carry into 2017.”

One sign of dollar deleveraging is the changingrelationship between Libor-OIS — or the difference betweenborrowing rates set by central banks and the rate at which bankslend to each other — and the cost of converting local currenciesinto dollars as measured by the so-called cross-currency basisswap.

Where once the two measures moved in opposite directions, theyhave now been moving in tandem — a sign that financialinstitutions' demand for U.S. dollars is potentially waning as“banks de-lever,” according to Citi. In such a scenario, banksdon't need to issue as much short-term funding in orderto obtain dollars, a development that would help pushLibor-OIS lower while keeping cross-currency basis swapsrelatively expensive.

“We have seen a negative relationship between the two going intothe reform but we are seeing a positive relationship between thetwo in recent months,” the analysts wrote.

Steven Zeng, analyst at Deutsche Bank AG, argued in a Dec. 4note that the breakdown in correlation between Libor-OIS spreadsand the cross-currency basis swap might be exacerbated asglobal markets head into the year-end — a time when bankstraditionally cut back on their leverage before presenting annualresults to investors and regulators.

“For now, we think the dislocation is in the FX swap/basismarket, which in addition to yielding to the usual year-endpressures … is also seeing increased hedging activities fromJapanese investors,” who have upped their purchases of foreignbonds in recent weeks, Zeng said.

Still, many see the strains as likely to persist into nextyear.

“We would like to stress the importance of dollar levels for ourinvestors,” Citi analysts concluded. “With Treasurysupply likely to dwindle due to the debt ceiling deadline andthe possibility of early delivery of a large-scale repatriation,2017 is gearing up to be a year of squeeze on short-endproducts.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.