Y2k Fears and Safe Haven Trading of the U.S. Dollar
39 Pages Posted: 15 Dec 2005
We assess the impact of safe haven flows on market liquidity by examining the bid-ask spread in the Euro-U.S. dollar spot and forward markets around Y2K. In the months preceding December 1999, it was widely believed that the U.S. was the best prepared for Y2K and funds would flow into U.S. assets. Intraday spot and forward spreads widen in December 1999 and stay wide through January 2000, well after the resolution of Y2K-related uncertainty. Daily spreads widen for one, three and six-month forwards maturing in January 2000. The explanation most consistent with these results is that Y2K-driven safe haven flows affect dealers' inventory positions and thereby market liquidity.
Keywords: foreign exchange, safe haven, bid-ask spread
JEL Classification: F31, G15
Suggested Citation: Suggested Citation