Dollar Funding Stress Mounts, S&P 500's Liquidity Risks Go Unseen

The US Dollar Index has reached a 52-week high, which may seem like a sign of relative strength for US investors but actually indicates a tightening force in the global system.

A stronger dollar makes dollar liabilities more expensive for borrowers outside the US, weakening local-currency balance sheets and lifting hedging costs. This can lead to a deterioration of leverage ratios, increased margin pressure, and rising funding costs.

The S&P 500 can become part of the funding story as it is deep, liquid, and widely held, often becoming a source of cash in times of dollar squeeze.

History shows that stress in currency markets often appears before major stock-market drawdowns. In 2007 and 2020, the EUR/USD cross-currency basis began to blow out before the S&P 500 reached its peak.