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Research in marketing strategy

• Review Paper
• Published: 18 August 2018
• Volume 47 , pages 4–29, ( 2019 )

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• Neil A. Morgan 1 ,
• Kimberly A. Whitler 2 ,
• Hui Feng 3 &
• Simos Chari 4  

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Marketing strategy is a construct that lies at the conceptual heart of the field of strategic marketing and is central to the practice of marketing. It is also the area within which many of the most pressing current challenges identified by marketers and CMOs arise. We develop a new conceptualization of the domain and sub-domains of marketing strategy and use this lens to assess the current state of marketing strategy research by examining the papers in the six most influential marketing journals over the period 1999 through 2017. We uncover important challenges to marketing strategy research—not least the increasingly limited number and focus of studies, and the declining use of both theory and primary research designs. However, we also uncover numerous opportunities for developing important and highly relevant new marketing strategy knowledge—the number and importance of unanswered marketing strategy questions and opportunities to impact practice has arguably never been greater. To guide such research, we develop a new research agenda that provides opportunities for researchers to develop new theory, establish clear relevance, and contribute to improving practice.

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We follow Varadarjan’s (2010) distinction, using “strategic marketing” as the term describing the general field of study and “marketing strategy” as the construct that is central in the field of strategic marketing—just as analogically “strategic management” is a field of study in which “corporate strategy” is a central construct.

Following the strategic management literature (e.g., Mintzberg 1994 ; Pascale 1984 ), marketing strategy has also been viewed from an “emergent” strategy perspective (e.g. Hutt et al. 1988 ; Menon et al. 1999 ). Conceptually this is captured as realized (but not pre-planned) tactics and actions in Figure 1 .

These may be at the product/brand, SBU, or firm level.

These strategic marketing but “non-strategy” coding areas are not mutually exclusive. For example, many papers in this non-strategy category cover both inputs/outputs and environment (e.g., Kumar et al. 2016 ; Lee et al. 2014 ; Palmatier et al. 2013 ; Zhou et al. 2005 ), or specific tactics, input/output, and environment (e.g., Bharadwaj et al. 2011 ; Palmatier et al. 2007 ; Rubera and Kirca 2012 ).

The relative drop in marketing strategy studies published in JM may be a function of the recent growth of interest in the shareholder perspective (Katsikeas et al. 2016 ) and studies linking marketing-related resources and capabilities directly with stock market performance indicators. Such studies typically treat marketing strategy as an unobserved intervening construct.

Since this concerns integrated marketing program design and execution, marketing mix studies contribute to knowledge of strategy implementation–content when all four major marketing program areas are either directly modeled or are controlled for in studies focusing on one or more specific marketing program components.

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Kelley School of Business, Indiana University, 1309 E. Tenth St., Bloomington, IN, 47405-1701, USA

Neil A. Morgan

Darden School of Business, University of Virginia, 100 Darden Boulevard, Charlottesville, VA, 22903, USA

Kimberly A. Whitler

Ivy College of Business, Iowa State University, 3337 Gerdin Business Building, Ames, IA, 50011-1350, USA

Alliance Manchester Business School, University of Manchester, Booth Street West, Manchester, M15 6PB, UK

Simos Chari

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Correspondence to Neil A. Morgan .

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Mark Houston served as Area Editor for this article.

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Morgan, N.A., Whitler, K.A., Feng, H. et al. Research in marketing strategy. J. of the Acad. Mark. Sci. 47 , 4–29 (2019). https://doi.org/10.1007/s11747-018-0598-1

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Received : 14 January 2018

Accepted : 20 July 2018

Published : 18 August 2018

Issue Date : 15 January 2019

DOI : https://doi.org/10.1007/s11747-018-0598-1

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Market research is a cornerstone of all successful, strategic businesses. It can also be daunting for entrepreneurs looking to launch a startup or start a side hustle . What is market research, anyway? And how do you…do it?

We’ll walk you through absolutely everything you need to know about the market research process so that by the end of this guide, you’ll be an expert in market research too. And what’s more important: you’ll have actionable steps you can take to start collecting your own market research.

What Is Market Research?

Market research is the organized process of gathering information about your target customers and market. Market research can help you better understand customer behavior and competitor strengths and weaknesses, as well as provide insight for the best strategies in launching new businesses and products. There are different ways to approach market research, including primary and secondary research and qualitative and quantitative research. The strongest approaches will include a combination of all four.

“Virtually every business can benefit from conducting some market research,” says Niles Koenigsberg of Real FiG Advertising + Marketing . “Market research can help you piece together your [business’s] strengths and weaknesses, along with your prospective opportunities, so that you can understand where your unique differentiators may lie.” Well-honed market research will help your brand stand out from the competition and help you see what you need to do to lead the market. It can also do so much more.

The Purposes of Market Research

Why do market research? It can help you…

• Pinpoint your target market, create buyer personas, and develop a more holistic understanding of your customer base and market.
• Understand current market conditions to evaluate risks and anticipate how your product or service will perform.
• Validate a concept prior to launch.
• Identify gaps in the market that your competitors have created or overlooked.
• Solve problems that have been left unresolved by the existing product/brand offerings.
• Identify opportunities and solutions for new products or services.
• Develop killer marketing strategies .

What Are the Benefits of Market Research?

Strong market research can help your business in many ways. It can…

• Strengthen your market position.
• Help you identify your strengths and weaknesses.
• Help you identify your competitors’ strengths and weaknesses.
• Minimize risk.
• Center your customers’ experience from the get-go.
• Help you create a dynamic strategy based on market conditions and customer needs/demands.

What Are the Basic Methods of Market Research?

The basic methods of market research include surveys, personal interviews, customer observation, and the review of secondary research. In addition to these basic methods, a forward-thinking market research approach incorporates data from the digital landscape like social media analysis, SEO research, gathering feedback via forums, and more. Throughout this guide, we will cover each of the methods commonly used in market research to give you a comprehensive overview.

Primary vs. Secondary Market Research

Primary and secondary are the two main types of market research you can do. The latter relies on research conducted by others. Primary research, on the other hand, refers to the fact-finding efforts you conduct on your own.

This approach is limited, however. It’s likely that the research objectives of these secondary data points differ from your own, and it can be difficult to confirm the veracity of their findings.

Primary Market Research

Primary research is more labor intensive, but it generally yields data that is exponentially more actionable. It can be conducted through interviews, surveys, online research, and your own data collection. Every new business should engage in primary market research prior to launch. It will help you validate that your idea has traction, and it will give you the information you need to help minimize financial risk.

You can hire an agency to conduct this research on your behalf. This brings the benefit of expertise, as you’ll likely work with a market research analyst. The downside is that hiring an agency can be expensive—too expensive for many burgeoning entrepreneurs. That brings us to the second approach. You can also do the market research yourself, which substantially reduces the financial burden of starting a new business .

Secondary Market Research

Secondary research includes resources like government databases and industry-specific data and publications. It can be beneficial to start your market research with secondary sources because it’s widely available and often free-to-access. This information will help you gain a broad overview of the market conditions for your new business.

Identify Your Goals and Your Audience

Before you begin conducting interviews or sending out surveys, you need to set your market research goals. At the end of your market research process, you want to have a clear idea of who your target market is—including demographic information like age, gender, and where they live—but you also want to start with a rough idea of who your audience might be and what you’re trying to achieve with market research.

You can pinpoint your objectives by asking yourself a series of guiding questions:

• What are you hoping to discover through your research?
• Who are you hoping to serve better because of your findings?
• What do you think your market is?
• Who are your competitors?
• Are you testing the reception of a new product category or do you want to see if your product or service solves the problem left by a current gap in the market?
• Are you just…testing the waters to get a sense of how people would react to a new brand?

Once you’ve narrowed down the “what” of your market research goals, you’re ready to move onto how you can best achieve them. Think of it like algebra. Many math problems start with “solve for x.” Once you know what you’re looking for, you can get to work trying to find it. It’s a heck of a lot easier to solve a problem when you know you’re looking for “x” than if you were to say “I’m gonna throw some numbers out there and see if I find a variable.”

How to Do Market Research

This guide outlines every component of a comprehensive market research effort. Take into consideration the goals you have established for your market research, as they will influence which of these elements you’ll want to include in your market research strategy.

Secondary Data

Secondary data allows you to utilize pre-existing data to garner a sense of market conditions and opportunities. You can rely on published market studies, white papers, and public competitive information to start your market research journey.

Secondary data, while useful, is limited and cannot substitute your own primary data. It’s best used for quantitative data that can provide background to your more specific inquiries.

Find Your Customers Online

Once you’ve identified your target market, you can use online gathering spaces and forums to gain insights and give yourself a competitive advantage. Rebecca McCusker of The Creative Content Shop recommends internet recon as a vital tool for gaining a sense of customer needs and sentiment. “Read their posts and comments on forums, YouTube video comments, Facebook group [comments], and even Amazon/Goodreads book comments to get in their heads and see what people are saying.”

If you’re interested in engaging with your target demographic online, there are some general rules you should follow. First, secure the consent of any group moderators to ensure that you are acting within the group guidelines. Failure to do so could result in your eviction from the group.

Not all comments have the same research value. “Focus on the comments and posts with the most comments and highest engagement,” says McCusker. These high-engagement posts can give you a sense of what is already connecting and gaining traction within the group.

Social media can also be a great avenue for finding interview subjects. “LinkedIn is very useful if your [target customer] has a very specific job or works in a very specific industry or sector. It’s amazing the amount of people that will be willing to help,” explains Miguel González, a marketing executive at Dealers League . “My advice here is BE BRAVE, go to LinkedIn, or even to people you know and ask them, do quick interviews and ask real people that belong to that market and segment and get your buyer persona information first hand.”

Market research interviews can provide direct feedback on your brand, product, or service and give you a better understanding of consumer pain points and interests.

When organizing your market research interviews, you want to pay special attention to the sample group you’re selecting, as it will directly impact the information you receive. According to Tanya Zhang, the co-founder of Nimble Made , you want to first determine whether you want to choose a representative sample—for example, interviewing people who match each of the buyer persona/customer profiles you’ve developed—or a random sample.

“A sampling of your usual persona styles, for example, can validate details that you’ve already established about your product, while a random sampling may [help you] discover a new way people may use your product,” Zhang says.

Market Surveys

Market surveys solicit customer inclinations regarding your potential product or service through a series of open-ended questions. This direct outreach to your target audience can provide information on your customers’ preferences, attitudes, buying potential, and more.

Every expert we asked voiced unanimous support for market surveys as a powerful tool for market research. With the advent of various survey tools with accessible pricing—or free use—it’s never been easier to assemble, disseminate, and gather market surveys. While it should also be noted that surveys shouldn’t replace customer interviews , they can be used to supplement customer interviews to give you feedback from a broader audience.

Who to Include in Market Surveys

• Current customers
• Past customers
• Your existing audience (such as social media/newsletter audiences)

Example Questions to Include in Market Surveys

While the exact questions will vary for each business, here are some common, helpful questions that you may want to consider for your market survey. Demographic Questions: the questions that help you understand, demographically, who your target customers are:

• “What is your age?”
• “Where do you live?”
• “What is your gender identity?”
• “What is your household income?”
• “What is your household size?”
• “What do you do for a living?”
• “What is your highest level of education?”

Product-Based Questions: Whether you’re seeking feedback for an existing brand or an entirely new one, these questions will help you get a sense of how people feel about your business, product, or service:

• “How well does/would our product/service meet your needs?”
• “How does our product/service compare to similar products/services that you use?”
• “How long have you been a customer?” or “What is the likelihood that you would be a customer of our brand?

Personal/Informative Questions: the deeper questions that help you understand how your audience thinks and what they care about.

• “What are your biggest challenges?”
• “What’s most important to you?”
• “What do you do for fun (hobbies, interests, activities)?”
• “Where do you seek new information when researching a new product?”
• “How do you like to make purchases?”
• “What is your preferred method for interacting with a brand?”

Survey Tools

Online survey tools make it easy to distribute surveys and collect responses. The best part is that there are many free tools available. If you’re making your own online survey, you may want to consider SurveyMonkey, Typeform, Google Forms, or Zoho Survey.

Competitive Analysis

A competitive analysis is a breakdown of how your business stacks up against the competition. There are many different ways to conduct this analysis. One of the most popular methods is a SWOT analysis, which stands for “strengths, weaknesses, opportunities, and threats.” This type of analysis is helpful because it gives you a more robust understanding of why a customer might choose a competitor over your business. Seeing how you stack up against the competition can give you the direction you need to carve out your place as a market leader.

Social Media Analysis

Social media has fundamentally changed the market research landscape, making it easier than ever to engage with a wide swath of consumers. Follow your current or potential competitors on social media to see what they’re posting and how their audience is engaging with it. Social media can also give you a lower cost opportunity for testing different messaging and brand positioning.

SEO Analysis and Opportunities

SEO analysis can help you identify the digital competition for getting the word out about your brand, product, or service. You won’t want to overlook this valuable information. Search listening tools offer a novel approach to understanding the market and generating the content strategy that will drive business. Tools like Google Trends and Awario can streamline this process.

Ready to Kick Your Business Into High Gear?

Now that you’ve completed the guide to market research you know you’re ready to put on your researcher hat to give your business the best start. Still not sure how actually… launch the thing? Our free mini-course can run you through the essentials for starting your side hustle .

About Mary Kate Miller

Mary Kate Miller writes about small business, real estate, and finance. In addition to writing for Foundr, her work has been published by The Washington Post, Teen Vogue, Bustle, and more. She lives in Chicago.

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More From Forbes

The most important marketing metric is driving business growth.

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Marketing's job is to drive business growth.

Over the past few years, many CEOs have encountered the same problem: the organization's media is more efficient than ever, but the business isn’t growing.

As digital, CRM, and more have evolved to create an abundance of digitally-infused customer experience activities, marketers have become responsible for an ever-growing list of options for how to spend their marketing dollars. While these innovations and the MarTech solutions that come with them have added immense value for the industry, they have also posed challenges for CMOs who’ve become deeply focused on optimizing each and every channel to ensure their reporting to the C-suite demonstrates value. The bigger picture – driving business growth – took a back seat.

Understandably, CEOs and their CFO counterparts appreciate some level of cost certainty for their marketing spend. Optimizing for channels provides comfort because it helps manage cost. Marketing’s job, however, is to drive growth – not simply manage cost.

Now, the industry’s best are demanding a shift to reposition marketing as a growth driver. In doing so, they’re fostering realignment on what marketing is responsible for among CEOs, CFOs, and beyond – all for the betterment of the business. Here’s how they’re doing it.

Prioritize Cultural Relevance and Brand

Don’t let performance marketing bog you down. For brands with some scale, prioritizing a marketing mix model that includes driving cultural relevance through brand marketing can make a big difference.

When Is The Voice Season 25 Finale All About The Star Studded Event

Ukraine is mobilizing tens of thousands of new troops. they need a lot more armored vehicles., sam altman apologizes to scarlett johansson over openai chatbot voice she called eerily similar to hers.

According to research from X (Twitter ), a quarter of consumer’s purchasing decisions are linked to a brand’s cultural involvement. Consumers aged 18-35, who have long been a priority due to their purchasing power, feel even more strongly that the brands they purchase align with culture. These aren’t just idyllic consumer responses – there’s proof.

When travel company Airbnb lost 80% of its business due to the Covid-19 pandemic, it simply could not afford to let marketing manage costs; it needed to be a growth driver. CEO, Brian Chesky, and Global Head of Marketing, Hiroki Asai, aligned on a shift from primarily performance-driven marketing to instead focus on brand campaigns – connecting with customers rather than buying them.

As Asai shared on the Marketing Today podcast, “When you’re over-indexed on performance, you don’t really have the opportunity to put a narrative out there to tell your story.” Instead, a brand-forward approach allowed Airbnb to do just that, linking it to the culture of modern traveling. According to Asai, those brand campaigns, “strike a chord and get to a deeper shared experience of humor or awe or irony about travel that we all love.”

By 2023, Airbnb made the Fortune 500 list for the first time ever, citing a revenue jump of 40.2% year over year .

With results like that, Chief Financial Officer Dave Stephenson praised the approach stating , “Our brand marketing results are delivering excellent results overall with a strong rate of return, and it’s been so successful that we’re actually expanding to more countries.”

Think Beyond the Television Screen

While Airbnb did make a splash through some memorable television spots, modern brand marketing requires thinking beyond that screen.

With endless content options, it’s become increasingly difficult to win consumer attention. The Interactive Advertising Bureau recently reported that in 2024, digital video spend is expected to surpass linear for the first time. At the same time, research from Bulbshare found that 99% of Gen Z say they’ll hit ‘skip’ on an ad if it’s an option. As media dollars and consumer behaviors shift, a holistic marketing mindset must be applied to build brand.

Soda brand Poppi, whose team has called it a “ creator-first brand ,” has leaned in on influencer partnerships and experiences as part of its brand strategy. Most recently, they took a big swing by engaging one of the most well-known TikTok influencers, Alix Earle, for their activation at the popular music festival Coachella. While many brands set up experiential activations and wide-ranging influencer partnerships, Poppi invested big in Earle – her cultural relevance, 6.6 million TikTok followers, and power to drive trends.

In a custom luxury house with over-the-top Poppi branding and merchandise, Earle’s partnership generated 4.5 million engagements, reaching over 275 million people. Poppi’s previous influencer partnerships have helped catapult the brand to the number one selling soft drink on Amazon, entering 5 million monthly new households in 2024.

As director of brand awareness and culture, Sophia Sesto shared with Ad Age , “You can’t 100% measure what it does in terms of a sale, but I'm already seeing so many videos in our TikTok tags, viral or not, with people talking about the ‘Alix Earle effect’ and going to the store and buying Poppi … It really is just [about] looking for brand awareness.”

Step Back, Evaluate, and Build a Winning Strategy

Taking big brand swings can require a little faith, but they don’t need to be built without data. Marketers looking to make a shift can start small, evaluate new ways to measure impact, and gradually develop a plan that works for the entire C-suite.

Brand marketing may not pay off as predictably as performance marketing, but the strategic shift will set you up for greater long-term business success. It’s time for marketers to drive a move away from the performance marketing obsession; they must be less safe and tactical and more strategic and growth-focused. When the CEO, CMO, and CFO realign on marketing’s role - and the levers that must be pulled to drive real business growth - the company will ultimately win.

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Analysis-Emerging Market Credit Ratings Are Finally Looking up Again

FILE PHOTO: A general view of fog over the Great Pyramids and old houses in Cairo, Egypt 24 January 2024. REUTERS/Amr Abdallah Dalsh/File Photo

By Marc Jones

LONDON (Reuters) - From Brazil, Nigeria and Turkey to even some of the riskiest emerging markets such as Egypt and Zambia, evidence is growing that a decade-long deterioration in sovereign credit ratings has finally started to reverse.

Economists watch ratings because they influence a country's borrowing costs and many are now highlighting a turnaround that seems incongruous with the usual warnings about rising debt pressures.

According to Bank of America, almost three-quarters of all sovereign rating moves by S&P, Moody's and Fitch this year have been in a positive direction, compared with the almost 100% that went the other way in the first year of the COVID pandemic.

With that and the spike in global interest rates now in the rear view mirror, more good news should be coming too.

Moody’s now has 15 developing economies on a positive outlook - rating firm parlance for an upgrade watch - one of its highest numbers ever. S&P has 17, while Fitch has seven more positive than negative outlooks, its best ratio since a post-global financial crisis rebound in ratings in 2011.

Fitch's global head of sovereign research Ed Parker said the turnaround has been down to a combination of factors.

For some countries it has been a general recovery from COVID and/or the energy price spikes caused by the Ukraine war. Others are seeing country-specific improvements in policymaking, while a core group of junk-rated "frontier" nations are now benefiting from suddenly being able to access debt markets again, he said.

Aviva Investors' head of EM hard currency debt, Aaron Grehan, describes the current upgrade wave as a "definitive shift" that has also coincided with a sharp drop in the premiums that emerging markets almost everywhere have had to pay to borrow.

"Since 2020, well over 60% of all rating actions have been negative. In 2024, 70% have been positive," Grehan said, adding that Aviva's internal scoring models were similar.

DECADE OF DOWNGRADES

The awkward reality though is that the current run of upgrades will not make up for the last 10-15 years.

Turkey, South Africa, Brazil and Russia all lost coveted investment grade scores during that time, while a deluge of debt almost everywhere apart from the Gulf has left the average EM credit rating more than a notch lower than it used to be.

And though some countries argue that developed economies where debt is still surging are being treated more leniently by the rating firms, EM finances are hardly sparkling now.

Eldar Vakitov, a sovereign analyst and "bond vigilante" at M&G Investments points to the International Monetary Fund's recent forecast that the average EM fiscal deficit will edge up to 5.5% of GDP this year.

Just a year ago, the assumption was that the 2023 EM fiscal expansion was a one-off that would be fully reversed this year. Now the EM fiscal deficit is expected to remain above 5% of GDP until the end of the Fund’s forecast horizon in 2029.

So why all the rating upgrades?

"For some countries it is all about the starting point," Vakitov said, explaining that even though government deficits were still wide, they had at least dropped down from peak COVID levels.

A few governments, such as Zambia, are getting a natural lift from coming out of debt restructurings while a number of places are making obvious policy improvements.

Turkey, which has already had a couple of upgrades for attacking its inflation problem head on, and Egypt which seems to have shaken off default worries, are both expected to see multi-notch upgrades now, according to market pricing.

"Rating agencies tend to be slow though," Vakitov said, "so it often takes them a lot of time to give upgrades."

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The downgrades have not stopped completely. Moody's and Fitch have both put China on a warning over the last six months, Israel's war has led to its first ever downgrades and Panama has been stripped of one of its investment grades.

Three years on from COVID spending splurges and the bills are having to be paid too. EM hard currency debt amortisations and coupon payments are expected to reach an all-time high of $134 billion this year, JP Morgan estimates.

That is up by $32 billion from last year, so it is not surprising then that emerging market policymakers are eager to do all they can to get their ratings up and keep borrowing costs down.

Indonesia's Finance Minister Sri Mulyani Indrawati explained in London this month how the agencies had doubted her when she told them during COVID that Indonesia would get its deficit back below 3% of GDP within 3 years.

"It ended up that we were able to consolidate the fiscal (position) in only two years," she said. "So I always like to say to my rating agency staff, I won the bet, so you have to upgrade my rating!"

(Reporting by Marc Jones; Editing by Alison Williams)

Copyright 2024 Thomson Reuters .

Tags: Turkey , Africa , Israel , Middle East , Europe , Brazil , Nigeria

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Main facts about the copper market as prices hit record highs

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The deputy chairman of the China Coal Transportation and Distribution Association (CCTD) told a seminar on Wednesday that annual output growth would be in a range of -1% to 1% this year, having previously forecast expansion of 1%.

Markets Chevron

TSX eyes lower open as commodity prices slip; Fed minutes on tap

Futures for Canada's main stock index eased on Wednesday, pressured by lower prices of most commodities, while investors awaited minutes of the U.S. Federal Reserve's last policy meeting for clues on the timing of its monetary policy easing.

Vulnerabilities in widely used short-term markets for funding companies need to addressed as stresses there can spread to the broader financial system during market turmoil, the global Financial Stability Board said on Wednesday.

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Swap lines curbed global dollar shortages, appreciation during COVID-19 crisis

May 21, 2024

The Federal Reserve’s balance sheet expanded by $3 trillion—to $7 trillion—during the first three months of the COVID-19 crisis, as the Fed dramatically increased the size and scope of its lending programs to aid the economy.

About $450 billion of this expansion—roughly one-sixth of balance sheet growth during the first three months of the crisis—was in the form of dollar liquidity swaps with foreign central banks ( Chart 1 ). Such swaps are short-term instruments used to ensure an emergency supply of dollars to foreign central banks during periods of financial stress.

Downloadable chart | Chart data

These dollar liquidity facilities (Fed swap lines) helped stabilize the supply and demand imbalances in overseas dollar funding markets, New York Fed economists Linda Goldberg and Fabiola Ravazzolo argue in a recent article . Additionally, the Fed swaps reduced the cost of offshore dollar borrowing, also known as the foreign exchange swap basis spread.

We argue that these same imbalances in the offshore dollar funding market also led to safe-haven appreciation of the dollar during the COVID-19 crisis and that central bank swap lines reversed this dollar appreciation.

Arbitrage constraints led to dollar shortages during COVID-19 crisis

In a previous article , we discussed how dollar liquidity shortages outside the U.S. can arise during a crisis due to arbitrage limits. These dollar shortages have led to the phenomenon of deviations from covered interest parity (the equilibrium relationship involving interest rates and spot and forward exchange rates between two countries).

Deviations from covered interest parity can be measured with the foreign exchange swap basis spread. A borrower with access to the onshore U.S. market could borrow dollars at a rate close to the U.S. Overnight Index Swap (OIS) rate. The OIS is the market expectation of the average value of the federal funds rate over a given period.

Alternatively, one could borrow dollars through “synthetic” dollar borrowing in the offshore markets. That is, borrowing funds in a foreign currency and then exchanging the sum into U.S. dollars using a swap contract. Mechanically, an investor converts the foreign currency into dollars in the spot market and at the same time enters into a forward contract to convert them back to the foreign currency at a future date at a predetermined exchange rate.

The interest rate on this synthetic dollar borrowing is the foreign OIS rate plus the forward premium—the difference between the forward and spot exchange rates. The forward rate is known when the contract is entered into, so there is no uncertainty. And if counterparty risk is negligible—that is, the credit worthiness of the counterparty on the other side of the swap—borrowing dollars onshore or synthetically should be risk-free transactions.

The foreign exchange swap basis spread is the difference between the cost of this synthetic dollar borrowing and onshore dollar borrowing. A positive spread indicates a higher price of dollar borrowing in the offshore markets and reflects an imbalance between supply and demand.

Increased demand for dollar liquidity in offshore markets would push up the interest rate on synthetic borrowing, leading to a positive swap basis spread. Large global banks and other lenders would recognize the arbitrage opportunity, borrow dollars from the onshore market in the U.S. and lend them in the offshore market. These actions would drive the foreign exchange swap basis spread to zero and relieve any dollar shortage in the offshore market.

This was the case before the 2008 Global Financial Crisis. However, the economics literature points to new regulations introduced since the 2008 crisis that have limited banks’ ability to pursue this arbitrage, resulting in dollar shortages abroad that worsen during a crisis when the demand for dollar liquidity is high. The result is a positive and widening swap basis spread during a crisis.

These limits to arbitrage can lead to the safe-haven appreciation of the dollar in a crisis. When overseas borrowers face a dollar shortage and an increased cost of synthetic dollar borrowing, they may be forced to raise the dollars quickly by selling their domestic currency assets, often in volatile market conditions, and converting the proceeds to dollars in the spot market.

This sudden demand for dollars pushes up their relative price in the foreign exchange market, leading to dollar appreciation.

Sudden overseas dollar shortage emerges in COVID-19 crisis

The COVID-19 crisis in March 2020 led to a sudden dollar shortage outside the U.S., as lenders and borrowers each sought to hoard dollars. Chart 2 plots the simple average of the foreign exchange swap spread in two groups of currencies.

“Standing” is the average of the currencies of the five central banks that have standing dollar liquidity swap lines with the Fed (Bank of Canada, Bank of England, European Central Bank, Swiss National Bank and Bank of Japan).

“Temporary” refers to the average of the nine currencies of central banks that gained temporary access to the Fed’s dollar liquidity swaps during the COVID-19 crisis (Norges Bank, Sveriges Riksbank, Reserve Bank of Australia, Reserve Bank of New Zealand, Bank of Denmark, Bank of Mexico, Bank of Brazil, Bank of Korea and Monetary Authority of Singapore).

Downloadable chart

A “dash for cash” early in the COVID-19 crisis resulted in a spike in the offshore dollar funding cost for the standing and temporary groups. The average foreign exchange swap spread for the standing group rose from around 20 basis points (0.2 percentage points) and for the temporary group from 35 basis points in January to close to 150 basis points for each in mid-March 2020.

Chart 3 plots the average exchange rate for the same groups. The exchange rate is written as foreign currency per U.S dollar, so an increase in the index indicates dollar appreciation. The dollar appreciated by 7 percent against the currencies in the standing group in the week and a half after the World Health Organization’s declaration of a worldwide pandemic on March 11. Over the same period, the dollar appreciated by 12 percent against the currencies of the countries later granted temporary access to the dollar liquidity facilities.

Central bank swap lines relieved dollar shortages

In 2008, during the Global Financial Crisis, the Fed and foreign central banks established dollar liquidity swap lines in response to overseas dollar shortages. The Fed and the foreign central banks would exchange an amount of their currencies for a short period, and the foreign central bank then lent these dollars to its domestic banks to reduce the dollar shortage in that country.

These dollar swap lines evolved, and at the time of the COVID-19 crisis in March 2020, standing dollar swap lines existed between the Fed and the five standing central banks.

Banks in the five participating countries could borrow dollar liquidity at a rate of the dollar OIS rate plus a specified spread. During the two crises, access to these dollar liquidity swaps was extended to nine other foreign central banks on a temporary basis. Central bankers lowered the spread that determined the borrowing cost, and an 84-day loan term was added to the usual seven-day term.

The first of this COVID-19-era swap-line activity settled on March 19—that is, the dollars were provided to the overseas borrower. Only central banks with standing swap access participated in this initial round. Also on March 19, temporary swap-line access was announced for the nine countries granted temporary standing, with swap settlements completed later in March.

The article by New York Fed economists Goldberg and Ravazzolo showed how the spreads, after widening during the initial days of the COVID-19 turmoil, narrowed once swap-line funding became available in offshore markets.

By early June, when swap-line borrowing peaked, the foreign exchange swap spread returned to prepandemic levels. Sharp currency depreciation among the standing central banks stopped on March 19, and within a week, these currencies had regained nearly half of the value lost in the first few weeks of the crisis. The bottom for the currencies of the temporary swap-line countries occurred a few days later. By early June, these currencies were back at prepandemic exchange levels.

About the authors

Scott Davis is an economic policy advisor in the Research Department of the Federal Reserve Bank of Dallas.

Pon Sagnanert is a senior financial economist in the Research Department at the Federal Reserve Bank of Dallas.

Related Articles

The stock market will inflate another 20% before the bubble bursts, research firm says

• The stock has another 20% rise left in it before the bubble deflates, Capital Economics predicted.
• The research firm forecast the S&P 500 to notch 6,500 before staging a correction. 
• That's because stocks tend to inflate rapidly right before the end of a bubble, the firm said. 

Investors on the lookout for signs of a bubble should expect the stock market to be pumped up by another 20% before correcting, Capital Economics researchers said. 

The research firm pointed to the latest run-up in stocks, with the S&P 500 and Dow Jones Industrial Average recently notching fresh records and major indexes headed for new all-time highs as the week kicked off on Monday. 

But investors trying to push the bull market higher should know that there's only so much more the market can gain. According to John Higgins, Capital Economics' chief market economist, stocks look like they're in a late-stage bubble, meaning equities are in for a steep rally before the bubble eventually bursts.

"There's always the temptation to sort of chase the market higher, but I'm not convinced that you should be doing that at this stage. The … story that we've been telling a year or so ago appears to be coming true," Higgins said in a recent podcast. "What is that story? I think that it's a simple one really that involves a bubble inflating in the stock market," he said, pointing to the excitement for big tech.

Wall Street's enthusiasm for AI mirrors the hype around internet stocks in the 90s, Higgins noted, which should be an omen for the market. The Nasdaq Composite lost 77% peak-to-trough in the early 2000s, with the overall market seeing $5 trillion in value wiped out by 2002.

It's "impossible" to predict when the bubble will finally burst, how deep stocks will fall, or what will trigger the correction, Higgins noted. But one could come as soon as the end of next year, he suggested, as that would lengthen the pandemic bull market to about 5 years, the lifespan of the dot-com bubble.

He predicted the S&P 500 could notch 6,500 by the end of 2025. That implies another 22% run-up in stocks before the bubble begins to deflate. 

"Bubbles tend to inflate the most in their final stages as the excitement sort of reaches fever-pitch," Higgins warned. 

Other market commentators have warned stocks look to be in a bubble , with stock prices blowing past a series of record highs in 2024. More extreme forecasters have predicted that stocks could crash as much as 65% as the hype for AI rapidly unwinds. 

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Research: What Companies Don’t Know About How Workers Use AI

• Jeremie Brecheisen

Three Gallup studies shed light on when and why AI is being used at work — and how employees and customers really feel about it.

Leaders who are exploring how AI might fit into their business operations must not only navigate a vast and ever-changing landscape of tools, but they must also facilitate a significant cultural shift within their organizations. But research shows that leaders do not fully understand their employees’ use of, and readiness for, AI. In addition, a significant number of Americans do not trust business’ use of AI. This article offers three recommendations for leaders to find the right balance of control and trust around AI, including measuring how their employees currently use AI, cultivating trust by empowering managers, and adopting a purpose-led AI strategy that is driven by the company’s purpose instead of a rules-heavy strategy that is driven by fear.

If you’re a leader who wants to shift your workforce toward using AI, you need to do more than manage the implementation of new technologies. You need to initiate a profound cultural shift. At the heart of this cultural shift is trust. Whether the use case for AI is brief and experimental or sweeping and significant, a level of trust must exist between leaders and employees for the initiative to have any hope of success.

• Jeremie Brecheisen is a partner and managing director of The Gallup CHRO Roundtable.

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