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Dollar swaps widen in sign of rising demand as Q4 nears

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4 thousand U.S. {dollars} are counted out by a banker counting foreign money at a financial institution in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Picture

LONDON, Sept 29 (Reuters) – Demand for {dollars} was on the rise in foreign money derivatives markets on Wednesday, because the final quarter of the yr approached and the buck rose to 10-month highs towards its friends.

Spreads on three-month euro-dollar, sterling-dollar and dollar-yen swaps have been at their widest for the reason that finish of December 2020, implying that non-U.S. debtors are ready to pay a premium to entry greenback funds.

In keeping with a dealer at a financial institution in London, the strikes have been as a result of “three-month contracts are actually capturing the year-end flip, when there may be extra demand for {dollars}”.

The euro-dollar three-month foundation swap widened to -22 foundation factors, from -7.5 bps on Tuesday , although that is effectively off ranges of round -90 foundation bps touched in March 2020 when the COVID-19 disaster triggered a scramble for {dollars}.

Merchants and analysts stated, nevertheless, that there was no signal of any cash market stress, noting that greenback demand tends to rise within the final quarter of every yr. This is actually because U.S. banks, the principle conduit for {dollars}, reduce lending to satisfy money reserve guidelines.

However the greenback index has surged in current weeks and is at present on the highest since final November , boosted by indicators the Federal Reserve may increase rates of interest subsequent yr and a bounce in U.S. Treasury yields.

Many consultants reckon greenback energy will proceed.

“The premise swap improvement displays the impression of one of many largest greenback positives which are supporting the foreign money in the meanwhile – the drain of extra greenback liquidity that ought to proceed to spice up the foreign money’s price and yield benefit,” stated Valentin Marinov, head of G10 FX at Credit score Agricole.

He additionally linked the strikes to expectations the U.S. Congress would approve a debt-ceiling extension, permitting the Treasury to borrow extra, simply because the Fed prepares to wind down bond-buying.

“The mixed impression of the 2 developments could be to empty the worldwide extra greenback liquidity, in a lift to the foreign money,” Marinov added.

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Reporting by Sujata Rao and Ritvik Carvalho; Modifying by Pravin Char

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