NEW YORK – The cost of raising short-term US dollar funds in Japanese and European currency swap markets surged to more than two-year highs on Monday, suggesting increased demand for the greenback as funding pressure grew due to volatile financial markets characterized by global central bank tightening.
The cross-currency basis swap, or relative premium for swapping euro and yen for dollars, has widened since last week due in part to year-end related demand for the US currency to square up corporate balance sheets, analysts said.
Dollar demand typically rises among corporates and asset management firms as the end of the year approaches, with portfolio rebalancing and fund transfers requiring currencies like the euro and yen to be converted to the US currency.
But that spread has remained elevated as investors grew cautious about the global outlook.
The three-month euro cross rate hit -52.250 basis points (bps) on Monday, the highest premium in favor of the dollar since March 2020 just before the pandemic became widespread.
The current euro swap rate meant that investors were willing to pay more than 52 bps over interbank rates to swap three-month euros into dollars.
The three-month yen swap rate was at -63.75, the highest since March 2020 as well, while sterling three-month swap rates were at -27 on Monday. Last Thursday, that premium was at -28 basis points, the highest since March 2022.
“There’s a little more funding stress this year than in 2021 and 2020,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.
He added that increased volatility from global tightening, central bank interventions, and high inflation have contributed to the stress.
