For a crude measure of breathlessness, look no further than the broad U.S. dollar index. For a more sophisticated view, try cross-currency basis swap spreads.

Think of these spreads as a discount for not having the U.S. currency — and still wanting it. A negative spread on G-10 currencies means that borrowing a unit of each of them and then converting the sum into dollars costs more than it would to borrow the greenback outright.

In theory, no gap should exist. Banks look for every opportunity to profit from any difference between the dollar interest rate implied by foreign-exchange rates and the rate available in the money market. Arbitrage would crush spreads.

Sure enough, basis-swap spreads were negligible before 2008, but now have turned deeply negative. To Hyun Song Shin, the Bank for International Settlements' head of research, they've gone from being “a rather esoteric corner of the foreign-exchange market” to “a relatively clean measure of the price of balance-sheet capacity of banks.” Lenders are walking away from free money because picking it up would require leverage, and that's expensive.

If BIS researchers are right, this could explain why Asia won't get much of an export kick by allowing local currencies to weaken against a resurgent dollar. Multicountry supply chains, greased by dollar loans, will grind slower as European banks pass on their own difficulties in procuring dollars.

Since early 2014, the basis swap has moved in perfect lockstep with the broad dollar: The higher the U.S. currency, the lower the spread. This gives rise to a disturbing scenario. If the 3.7% rise in the trade-weighted dollar index since Donald Trump's election victory extends into 2017, the greenback shortage in the global banking system could start causing serious earnings misses, especially in Asia.

Unless watered down or delayed, harsh Basel IV rules, expected to be announced by early 2017, might lead to European lenders scrambling for a further 900 billion euro ($949 billion) in capital. That, too, could see them tone down corporate credit to Asia, where they're a bigger supplier of dollars than more comfortably capitalized U.S. banks.

Odds are that the VIX will remain a puppet on central banks' strings, and fail to give any advance warning. For investors, it might be the time to bow to the new king of pain.

Bloomberg News

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