Dollar swaps widen in sign of rising demand as Q4 nears

LONDON (Reuters) – Demand for dollars was on the rise in currency derivatives markets on Wednesday, as the last quarter of the year approached and the greenback rose to 10-month highs against its peers.

Spreads on three-month euro-dollar, sterling-dollar and dollar-yen swaps were at their widest since the end of December 2020, implying that non-U.S. borrowers are prepared to pay a premium to access dollar funds.

According to a trader at a bank in London, the moves were because “three-month contracts are now capturing the year-end turn, when there is more demand for dollars”.

The euro-dollar three-month basis swap widened to -22 basis points, from -7.5 bps on Tuesday, though this is well off levels of around -90 basis bps touched in March 2020 when the COVID-19 crisis triggered a scramble for dollars.

Traders and analysts said, however, that there was no sign of any money market stress, noting that dollar demand tends to rise in the last quarter of each year. This is often because U.S. banks, the main conduit for dollars, cut back lending to meet cash reserve rules.

But the dollar index has surged in recent weeks and is currently at the highest since last November, boosted by signs the Federal Reserve could raise interest rates next year and a jump in U.S. Treasury yields.

Many experts reckon dollar strength will continue.

“The basis swap development reflects the impact of one of the biggest dollar positives that are supporting the currency at the moment – the drain of excess dollar liquidity that should continue to boost the currency’s rate and yield advantage,” said Valentin Marinov, head of G10 FX at Credit Agricole.

He also linked the moves to expectations the U.S. Congress would approve a debt-ceiling extension, allowing the Treasury to borrow more, just as the Fed prepares to wind down bond-buying.

“The combined impact of the two developments would be to drain the global excess dollar liquidity, in a boost to the currency,” Marinov added.

Swaps: https://fingfx.thomsonreuters.com/gfx/mkt/byvrjlddave/swaps.PNG

(Reporting by Sujata Rao and Ritvik Carvalho; Editing by Pravin Char)

LONDON (Reuters) – Demand for dollars was on the rise in currency derivatives markets on Wednesday, as the last quarter of the year approached and the greenback rose to 10-month highs against its peers.

Spreads on three-month euro-dollar, sterling-dollar and dollar-yen swaps were at their widest since the end of December 2020, implying that non-U.S. borrowers are prepared to pay a premium to access dollar funds.

According to a trader at a bank in London, the moves were because “three-month contracts are now capturing the year-end turn, when there is more demand for dollars”.

The euro-dollar three-month basis swap widened to -22 basis points, from -7.5 bps on Tuesday, though this is well off levels of around -90 basis bps touched in March 2020 when the COVID-19 crisis triggered a scramble for dollars.

Traders and analysts said, however, that there was no sign of any money market stress, noting that dollar demand tends to rise in the last quarter of each year. This is often because U.S. banks, the main conduit for dollars, cut back lending to meet cash reserve rules.

But the dollar index has surged in recent weeks and is currently at the highest since last November, boosted by signs the Federal Reserve could raise interest rates next year and a jump in U.S. Treasury yields.

Many experts reckon dollar strength will continue.

“The basis swap development reflects the impact of one of the biggest dollar positives that are supporting the currency at the moment – the drain of excess dollar liquidity that should continue to boost the currency’s rate and yield advantage,” said Valentin Marinov, head of G10 FX at Credit Agricole.

He also linked the moves to expectations the U.S. Congress would approve a debt-ceiling extension, allowing the Treasury to borrow more, just as the Fed prepares to wind down bond-buying.

“The combined impact of the two developments would be to drain the global excess dollar liquidity, in a boost to the currency,” Marinov added.

Swaps: https://fingfx.thomsonreuters.com/gfx/mkt/byvrjlddave/swaps.PNG

(Reporting by Sujata Rao and Ritvik Carvalho; Editing by Pravin Char)