Deviations from covered interest rate parity (CIP) have been attributed to limits to arbitrage, but trading volumes surge during periods of no-arbitrage violations. We show that such distortions are caused by constraints on non-U.S. agents’ access to wholesale U.S. dollar markets, and thus reflect a premium for obtaining unencumbered synthetic dollar funding. Three main findings emerge. First, non-U.S. banks substitute secured USD borrowing with foreign exchange swaps to comply with regulatory requirements. Second, the cross-currency basis reflects the shadow costs imposed on non-U.S. agents for borrowing in U.S. wholesale segments. Third, U.S. dealers extract rents on dollar provision; the costs are ultimately passed on to the real economy, with non-U.S. customers paying an additional $10.4 billion in hedging costs. Our study highlights how intermediary constraints impact interconnected money markets and drive segmentation in global dollar funding.