U.S. dollar currency swaps widen as demand increases as fourth quarter approaches

Four thousand US dollars are counted by a banker counting change at a bank in Westminster, Colorado on November 3, 2009. REUTERS / Rick Wilking / File Photo

LONDON / NEW YORK, Sept. 29 (Reuters) – Demand for U.S. dollars rose in currency derivatives markets on Wednesday as the last quarter of the year approached and the greenback hit highs of over 10 months compared to his peers.

Spreads on euro-dollar, sterling-dollar and three-month dollar-yen swaps were at their highest since December 2020, implying that non-U.S. Borrowers are willing to pay a premium to access dollar funds.

A trader at a bank in London said the moves were due to the fact that “three-month contracts now capture the end-of-year turn, when there is more demand for dollars.”

Demand for dollars typically increases among businesses and asset management firms as the end of the year approaches, with portfolio rebalancing and fund transfers requiring the conversion of currencies such as the Euro and the Euro. British pound in US currency.

The three-month euro-dollar basis swap widened to -22 basis points, from -7.5 on Tuesday, although well above the levels of around -90 basis points hit in March 2020 when the COVID-19 crisis sparked a dollar rush.

The yen’s three-month currency swap was at -25 basis points, also the widest since December of last year.

Traders and analysts, however, said there were no signs of strain in the money market, noting that demand for dollars tended to increase in the last quarter of each year. This is often explained by the fact that American banks, the main conduit for channeling dollars, reduce loans to comply with liquidity reserve rules.

“In absolute terms, even after this morning’s moves, we are way above the usual drains seen towards the end of the year,” said Daniel Tenengauzer, Head of Markets Strategy at BNY Mellon Markets. He added that the current spread for yen swaps was much narrower from the -35 basis points seen towards the end of 2020.

The dollar index, however, has surged in recent weeks and is currently at its highest level since last November, boosted by the surge in US Treasury yields amid signs the Federal Reserve may raise interest rates to the end of next year.

Many experts believe that the strength of the dollar will continue.

“The development of core swaps reflects the impact of one of the biggest positives in the dollar that is supporting the currency at this time – the drain of excess dollar liquidity which is expected to continue to raise the currency’s rate and the yield advantage, “said Valentin Marinov, head of the G10. FX at Crédit Agricole.

He also linked the measures to expectations that the US Congress would approve an extension of the debt ceiling, allowing the Treasury to borrow more, just as the Fed prepares to reduce its bond purchases.

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


Reporting by Sujata Rao, Ritvik Carvalho in London and Paritosh Bansal and Gertrude Chavez-Dreyfuss in New York Editing by Pravin Char and Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.

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