global dollar liquity is probably the most important driver for global financial markets yet it’s also largely overlooked and in a cautionary sign for markets on the decline that’s according to christopher dembik head of macroeconomic research at saxo bank who notes the dollar liquidity is contracting for the first time since early 2019 “usually this is a synonym of market turmoil and higher risk aversion” he said in a note to clients that published tuesday given it’s a dollarbased world liquidity for that currency “serves as a key driver of the global economy and financial markets” he said since mid2021 it has slowly begun to decrease but liquidity was still plentiful up to the recent crisis in uk financial markets “the liquidity issue on the uk bond market which triggered an emergency intervention from the bank of england is one example of what may happen in the coming months if liquidity especially us dollar liquidity is scarce” said the analyst there have been two previous instances of crisis linked to dollar liquidity in 2015 when china devalued its currency and in early 2019 during the stress of the chinaus trade war in both cases markets experienced emergingmarket turmoil deteriorating financial conditions and higher us dollar funding costs “but there is one major difference compared to 2015 and 2019 there was no inflation at the time it is now the single one major issue for policymakers” said dembik with inflation still not having peaked in many countries outside of the us central banks will have no choice but to keep tightening and normalizing policy he said “this means that us dollar liquidity will continue to fall in the shortterm it will have a net negative impact on financial markets especially the equity segment and the global economy” he warned the dollar has been in high demand this year as investors have juggled concerns over central bank tightening higher inflation and geopolitical tensions the ice dollar index dxy has climbed nearly 18 read uk 30year bond yields breach 5 after bank of england stresses support will stop at end of week plus here’s how you’ll know stockmarket lows are finally here says legendary investor who called ’87 crash