LONDON Reuters - Demand for Dollars rose on Wednesday in the currency derivatives markets, as the last quarter of the year approached and the Greenback went to 10 month highs against its peers.
Spreads of three-month Euro-dollar, US exchange rates and currency-yen swaps were at their highest since December 2020, implying that non-U. S. borrowers are prepared to pay a premium to access dollar fund 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 on Tuesday to - 22 basis points, from -7.5 basis points, though this is well off levels of around 90 basis bps touched in March 2020 when the COVID -19 crisis triggered a scramble for money.
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 now 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.
The basis swap development reflects the impact of one of the biggest dollar positives which are supporting the currency at the moment the drain of excess liquidity that should continue to boost the currency's rate and yield advantage, said Valentin Marinov, head of G 10 FX at Credit Agricole.
He also tied the moves to expectations that the U.S. Congress would approve a debt ceiling extension, so that the Treasury can borrow more while the Fed prepares to end bond buying in.
The combined impact of the two developments would be to boost the global surplus in Yugoslavia, Marinov explained.